CANADA FX DEBT-C$ falls on Canadian political worry
* Canadian dollar falls 0.7 percent versus greenback
* Opposition threats to topple gov't raises uncertainty
* Bonds rise, but lag U.S. Treasuries
By Cameron French
TORONTO, Nov 28 (Reuters) - The Canadian dollar ended lower versus the U.S. currency on Friday as the greenback strengthened, while Canadian investors fretted about the possibility of a second federal election in three months.
Canadian bond prices rose slightly on economic concerns, pushing yields to their lowest levels in more than a decade.
The currency finished at C$1.2370 to the U.S. dollar, or 80.70 U.S. cents, down from C$1.2311 to the U.S. dollar, or 81.23 U.S. cents, at Thursday's close.
Concerns that Canada's Conservative government could fall emerged late on Thursday when the opposition Liberals and two other opposition parties said they could bring down the government over its fiscal update, which did not include large-scale stimulus measures to tackle the effects of the global financial crisis.
The Liberals have prepared a motion of no confidence for possible debate on Monday, although analysts said the market was not pricing in a serious possibility that the government could go down.
"The chatter on the politics might have been a modest drag overall," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
The currency fell as far as C$1.2470, or 80.19 U.S. cents, around midday, before rebounding a bit.
For the week, the Canadian dollar rose 2.6 percent.
Osborne also attributed weakness to heavy U.S. dollar buying ahead of the London gold price fix late in the morning.
The U.S. currency rose sharply versus the euro.
Canadian bonds rose in the wake of U.S. Treasuries as worries about the global economy built expectations of further interest rate cuts.
However, a strong 5.9 percent rise in Canadian stocks coupled with the weaker currency kept Canadian debt from matching the sharper rise in U.S. Treasuries.
"The U.S. market rallied a lot. We did OK, but we actually lagged considerably," said Mark Chandler, fixed income strategist at RBC Capital Markets.
Yields of two-, 10-, and 30-year bonds all hit their lowest marks in over a decade on Friday.
"Overall, the story on why global yields are down is just continued talk or anticipation of easier (monetary) policy... and a whole bunch of expected soft data," Chandler said.
Canadian third-quarter gross domestic product will be released on Monday. Analysts expect annualized growth of 1.1 percent.
The government said in its update it expects the economy to contract in the fourth quarter of this year and the first quarter of next year.
The Canadian overnight Libor rate LIBOR01 was 2.5000 percent, up from 2.4417 percent on Thursday.
The two-year bond rose 4 Canadian cents to C$102.06 to yield 1.699 percent. The 10-year bond gained 21 Canadian cents to C$107.46 to yield 3.327 percent.
The yield spread between the two-year and 10-year bond was 179 basis points, down from 177 at the previous close.
The 30-year bond climbed 45 Canadian cents to C$118.65 to yield 3.909 percent. In the United States, the 30-year Treasury yielded 3.437 percent. (Editing by Peter Galloway)
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