Surprise rate cut drives Brazil local yields down

SAO PAULO, June 12 (Reuters) - Yields on Brazilian interest rate future contracts <0#DIJ:> tumbled the most in three months on Friday after the central bank unexpectedly cut the benchmark Selic rate more than expected at a meeting two days ago.

The bank's monetary policy committee, known as Copom, trimmed the Selic by one percentage point to a record low 9.25 percent on Wednesday and said further reductions from now on will be carried out "more parsimoniously."

Brazilian markets were closed on Thursday in observance of a national holiday.

The yield on the contract due in Jan. 2010 DIJF0, the most-widely traded in Sao Paulo, plummeted 0.24 percentage point to 8.97 percent, the first time it broke the 9 percent mark. The yield reflects investors' expectations for the Selic at the end of the year.

"What the bank told us is that things aren't so rosy going forward, in terms of growth, and that the local yield curve isn't factoring in the seriousness of the downturn and its implications on inflation," said Jose Francisco Goncalves, chief economist with Banco Fator in Sao Paulo, and who predicted a full-percentage point reduction in the Selic.

Yields for longer-termed futures contracts also tumbled.

The yield for Jan. 2011 DIJF1 contract dropped to 10.18 percent from 10.42 percent on Wednesday's close. And the yield for the Jan. 2012 contract DIJF2 fell to 11.17 percent from 11.40 percent.

Economic data readings have shown little improvement in April and May, said Goncalves. And the central bank may want to continue taking stern measures if necessary, said Kathryn Rooney of Miami-based Bulltick LLC.

"Clearly the focus is on growth here," Rooney, Bulltick's emerging markets strategist, told Reuters in a phone interview from New York.

REAL GAINS

The real (BRBY), Brazil's currency, gained 0.7 percent to 1.938 to the dollar -- its first increase in three sessions.

Friday's rise, which traders said took place amid light trading volumes, extended the real's gains in the year to 20.2 percent.

The benchmark Bovespa index .BVSP rose despite a decline in commodity prices. Often the local stock market rises in line with prices of oil, metals and other raw materials -- which account for about a third of Brazilian exports.

The Bovespa opened 0.8 percent higher at 53,832.93 points. Futures on the index's contract due at the end of the month rose 0.7 percent.

Petrobras (PETR4.SA), the most heavily-weighted stock in the index, led gains. The state oil company rose 0.9 percent to 34.19 reais after the company said on Wednesday it might have found natural gas off the coast of Brazil.

BM&F Bovespa (BVMF3.SA), the holding company that controls the stock exchange, gained 1.1 percent to 11.98 reais. Stocks also rose on the eve of the expiration of stock options on Monday, traders said. (Reporting by Guillermo Parra-Bernal and Luciana Lopez; Editing by Theodore d'Afflisio)