The yield on the contract due January 2011 DIJF1 fell to 10.37 percent from 10.46 percent. The yield on the contract due April 2010 DIJJ0 fell to 8.75 percent from 8.8 percent. Both were among the most active contracts of the morning.

The government on Thursday said that gross domestic product expanded 1.3 percent on a quarter-on-quarter basis, weaker than the 2 percent expected in the median forecast of 18 analysts in a Reuters poll.

The data provided fresh evidence that an economic recovery is coming in at a less intense pace than previously forecast, allowing the central bank to keep rates on hold for a longer period, economists said.

The country is still on a growth trajectory, but it's a more moderate growth, and also more balanced, said Newton Rosa, an economist with SulAmerica Investimentos. This gives the central bank more calm to conduct monetary policy over the next few months.

The previous night, central bank policymakers kept the country's benchmark interest rate, the Selic, at 8.75 percent for the third consecutive meeting.

Investors use the contracts to bet on future trends in the Selic. The drop in yields suggests that investors don't see tighter rates in Brazil's future anytime soon.

Longer-term interest rate futures contracts remained lightly traded on Thursday.

This reinforces our call of rate hikes somewhere around the start of the second half of 2010, Rosa said.

The central bank slashed a cumulative 500 basis points off the benchmark interest rate this year in an effort to help jump start the then-flagging economy.

STOCKS, CURRENCY GAIN

Stocks rose in Brazil in early trading, with the benchmark Bovespa index .BVSP rising 1 percent to 68,688.87, helped by commodity prices.

The GDP data, as well, could reassure investors who foresee tighter interest rates further down the line, said Carlos Camacho, a fund manager with GAP Asset Management.

The 19-commodity Reuters-Jefferies index .CRB added 0.32 percent. The Bovespa index includes a number of shares tied to the trade in raw materials, including the two most heavily-weighted stocks, Petrobras and Vale.

State-controlled energy company Petrobras (PETR4.SA) added 0.3 percent to 37.70 reais as crude oil CLc1 saw volatile trading.

Mining company Vale (VALE5.SA), the world's largest iron ore producer, led gains as it rose 2.1 percent to 42.37 reais.

Brazil's currency, the real (BRBY), strengthened 0.62 percent to 1.761 per dollar. The greenback slipped .DXY against a basket of major currencies after a narrower-than-expected U.S. trade deficit for October reduced safe-haven demand for the greenback.

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