CANADA FX DEBT-C$ hits 2-1/2-month high as rate cut bets recede

* Canadian dollar at C$1.3626, or 73.39 U.S. cents
    * Bond prices mixed across the maturity curve

    TORONTO, Feb 25 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Thursday, hitting a 2-1/2-month
high as bets receded that the Bank of Canada will cut interest
rates this year.
    The currency extended its recovery from a 12-year low of
C$1.4689 in January, helped by stabilization in crude oil prices
and the shifting of the fiscal stimulus burden from the Bank of
Canada to the Canadian government. 
    Earlier this week, Finance Minister Bill Morneau said the
federal government will run much bigger deficits than
anticipated and push ahead with plans to invest in
infrastructure projects. 
    Adding private-sector investment to projects could spur even
greater spending, reducing the odds of another Bank of Canada
rate cut. The central bank cut rates twice last year.
    The implied probability of a 25-basis-point rate cut by July
has dropped to 37 percent from around 60 percent at the start of
the week. 
    The Canadian dollar's gains were briefly pared after U.S.
data revealed that new orders for long-lasting manufactured
goods rose in January by the most in 10 months.    
    At 9:47 a.m. EST (1447 GMT), the Canadian dollar 
was trading at C$1.3626 to the greenback, or 73.39 U.S. cents,
stronger than Wednesday's official close of C$1.3687, or 73.06
U.S. cents.
    The currency touched its strongest level since Dec. 10 at
C$1.3600, while its weakest was C$1.3735.    
    It was also supported by a rally in European shares and
shrugged off a 6 percent drop in Chinese stocks. 
    Oil prices fell on concerns about oversupply against a
backdrop of a slowing global economy, although strong U.S.
gasoline demand helped limit losses. 
    U.S. crude prices were down 1.31 percent to $31.73 a
    Canadian government bond prices were mixed across the
maturity curve, with the two-year price down 0.5
Canadian cent to yield 0.497 percent and the benchmark 10-year
 rising 12 Canadian cents to yield 1.137 percent.
    The Canada-U.S. 10-year bond spread rose 1.5 basis points to
-57.7 basis points, its highest since October, as Treasuries
extended their recent outperformance.

 (Reporting by Fergal Smith; Editing by Paul Simao)