* Yields fall in session of light trading volumes
* Rousseff seen embracing conciliatory policy tone
* Yields fall as investors await for U.S. policy steps (Recasts to add context on yield declines, vote result, comments in paragraphs 1-4, 6-9)
By Guillermo Parra-Bernal and Paula Arend Laier
SAO PAULO, Nov 1 (Reuters) - Yields on Brazilian interest-rate futures contracts <0#DIJ:> fell on Monday, in a session marked by light trading volumes, after President-elect Dilma Rousseff pledged to control inflation and rein in government spending.
Rousseff, who was hand-picked by incumbent President Luiz Inacio Lula da Silva to become his successor, won a run-off vote on Sunday. In her victory speech, she highlighted the need to maintain solid macroeconomic management, improve the quality of budget spending and stimulate private investment.
“Markets reacted well to her words, especially when she carefully spelled out the delicate issue of public expenses,” said Fernando Mendes, head of fixed-income trading at Lerosa Investimentos in Sao Paulo.
By pledging to be disciplined, Rousseff is likely paving the way for policies that will bring Brazil’s explosive economic growth rates to more sustainable levels.
Economists in a weekly central bank survey released on Monday raised their estimates for economic growth this year to 7.60 percent from 7.55 percent the prior week. [ID:nN01124350]
The yield on the rate futures contract due in January 2013 DIJF3 fell 6 basis points to 11.65 percent from 11.71 percent Friday. The yield on the Jan. 2012 contract DIJF2 declined 2 basis point to 11.32 percent.
Full coverage of election [ID:nBRAZIL]
Graphic of poll result link.reuters.com/bup23q
Election Top News page link.reuters.com/dux43p
Special report on Rousseff link.reuters.com/fab25p
Rousseff’s economic policies [ID:nN31100256]
Political risks in Brazil [ID:nRISKBR]
One basis point equal one-hundredth of a percentage point.
Trading volumes were small as many banks closed their trading desks ahead of a national holiday on Tuesday.
The fact that former Finance Minister Antonio Palocci, a market darling, was at Rousseff’s side during the speech reinforced expectations that he could help Rousseff direct policy towards a market-friendly agenda for growth embracing a lower tax burden and strong regulatory agencies, RBS said.
“Palocci could take up an important position in her administration,” Lerosa’s Mendes said.
For months, remarks by Rousseff that Brazil was in no need for drastic budget cuts and pledges to boost the size of the state rattled investors in the fixed-income market, who pushed yields higher in a bet that inflation could accelerate in the years to come.
Investors use the rate futures markets as a gauge of future monetary policy moves and the outlook for inflation. Yields are seen as a close indicator of the level of the central bank’s benchmark Selic rate at the end of every contract.
Limiting declines in yields, the central bank survey showed that analysts raised for a seventh week their forecasts for the year-end inflation rate this year. Forecasts for next year’s inflation rate also were lifted.
Traders also said that yields could fall further if the U.S. Federal Reserve announces steps aimed at staving off the risk of deflation in the world’s largest economy. The U.S. central bank holds a two-day policy-setting meeting on Tuesday and Wednesday.
Investors are expecting the Fed to extend asset purchases from financial institutions that were hard hit by the impact of the 2008-2009 financial crisis. Concern has mounted in recent weeks that the U.S. economy could slide into recession again without firm policy action.
Editing by W Simon and Chizu Nomiyama