* Canadian dollar rises for second straight day
* C$ lifted by big current account surplus, oil drags
* Bonds fall on inflation risks, technical factors
By John McCrank
TORONTO, May 29 (Reuters) - The Canadian dollar held on to close higher against the greenback on Thursday, but much of the early gains that were built on a big current account surplus were eroded by a sharp pullback in the price of oil.
Domestic bond prices fell along with the bigger U.S. market as growing concerns about inflation had investors betting on higher interest rates in the not too distant future.
The Canadian dollar closed at US$1.0110, valuing a U.S. dollar at 98.91 Canadian cents, up from US$1.0102, valuing a U.S. dollar at 98.99 Canadian cents, at Wednesday's close.
The currency climbed as high as US$1.0179, valuing a U.S. dollar at 98.24 Canadian cents, after Statistics Canada data showed the country's current account surplus soared to C$5.56 billion in the first quarter, helped by higher prices for energy and agricultural exports. That beat the C$2.90 billion surplus expected by analysts surveyed by Reuters.
Statscan also revised the fourth-quarter current account figure to a C$778 million surplus from a C$513 million deficit.
"The reports of the death of Canada's current account surplus, as the saying goes, were greatly exaggerated," Michael Gregory, senior economist at BMO Capital Markets, said in a note. "Rising commodity prices literally raised it from the dead, and should provide life support in Q2 as well."
The currency came under pressure however as the July oil price fell $4.41, or 3.37 percent, to settle at $126.62, despite figures showing a drop in U.S. crude supplies. See [ID:nN29396445]
"The inventory data by itself was positive for oil, but then there were stories that the huge drawdowns in inventories were more due to delays in shipments rather than an actual and prolonged drawdown," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"So, we saw oil coming down very sharply and, on the back of that, the Canadian dollar selling off."
Looking ahead, Canadian first-quarter gross domestic product data is due on Friday. Analysts surveyed by Reuters expect, on average, GDP growth of 0.3 percent in the quarter.
BOND PRICES FALL
Bond prices, following the lead of the U.S. Treasury market, extended recent losses amid talk that rising inflation could lead to rate hikes.
"The market is starting to price in a rate hike by September," said Sheldon Dong, fixed income strategist at TD Waterhouse Private Investment.
Dong also said there were technical factors dragging down U.S. bond prices, and setting the trend for Canada, including a tremendous amount of new corporate issuance over the past two months, which has tilted the supply-demand balance in favor of the supply side.
"Number two, the (U.S.) 10-year yield broke through its 200-day moving average of 4 percent yesterday, so that's why we've got an exaggerated selloff. I think traders are now targeting 4.30 (percent) as the next trading level," he said.
The two-year bond fell 3 Canadian cents to C$101.25 to yield 3.102 percent. The 10-year bond slid 24 Canadian cents to C$102.16 to yield 3.715 percent.
The yield spread between the two- and 10-year bond was 61.3 basis points, up from 60.2 at the previous close.
The 30-year bond shed 53 Canadian cents to C$114.37 for a yield of 4.144 percent. In the United States, the 30-year treasury yielded 4.754 percent.
The three-month when-issued T-bill yielded 2.70 percent, down from 2.71 percent at the previous close.