UPDATE 2-Brazil yields decline on optimism over Rousseff

* Yields fall in session of light trading volumes

* Rousseff seen embracing conciliatory policy tone

* Yields fall as investors await for U.S. policy steps
(Updates prices, adds comments in paragraphs 3-7)

By Guillermo Parra-Bernal and Paula Arend Laier

SAO PAULO, Nov 1 (BestGrowthStock) – 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.

The yield on the rate futures contract due in January 2013
(DIJF3: ) fell 7 basis points to 11.64 percent from 11.71 percent
Friday. The yield on the Jan. 2012 contract (DIJF2: ) declined 2
basis points to 11.32 percent.

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.

“A hawkish fiscal stance will pave the way to a significant
secular realignment in rates in Brazil,” wrote Aloisio Teles,
an economist with Nomura Securities in New York.

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. The country’s
$1.7 trillion economy is expected by government officials to
expand at its fastest pace in 24 years this year.

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]

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Full coverage of election [ID:nBRAZIL]

Graphic of poll result http://link.reuters.com/bup23q

Election Top News page http://link.reuters.com/dux43p

Special report on Rousseff http://link.reuters.com/fab25p

Rousseff’s economic policies [ID:nN31100256]

Political risks in Brazil [ID:nRISKBR]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

One basis point equals 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 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.

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.

U.S. STEPS, INFLATION

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 Andrew Hay)

UPDATE 2-Brazil yields decline on optimism over Rousseff