* Canada dollar rallies on news of a return to jobs growth
* August data eases concerns fanned by July contraction
* Canadian currency's gains limited by further drop by oil
* Bond prices rise but gains erode after jobs report
By Frank Pingue
TORONTO, Sept 5 (Reuters) - Stronger-than-expected Canadian jobs figures helped lift the country's currency from overnight weakness versus the U.S. dollar on Friday, while bond prices remained higher but off earlier levels.
At 8:15 a.m. (1215 GMT), the Canadian unit was at C$1.0669 to the U.S. dollar, or 93.73 U.S. cents, up from C$1.0695 to the U.S. dollar, or 93.50 U.S. cents, at Thursday's close.
The boost in the Canadian dollar followed the latest piece of domestic data that showed the economy created 15,200 jobs in August, which was nearly double expectations and eased fears of an economic slowdown after the loss of 55,000 jobs in July.
The Canadian dollar rallied as high as C$1.0635 to the U.S. dollar, or 94.03 U.S. cents, moments after the report landed.
"It's not a blow-off-the-roof strong report, but it is certainly more than the market could have reasonably expected," said Eric Lascelles, chief economist and rates strategist at TD Securities.
"The details of the report are stronger than the surface, the surface is fine to begin with, and it all does speak to a Canadian economy that is not quite as weak as is popularly believed."
Some recent pieces of Canadian data had convinced many that the Canadian economy was headed for a recession, but a report last week showed the economy barely avoided a recession in the second quarter.
Gains in the Canadian currency were being limited by a drop in oil prices toward $107 a barrel, which tends to weigh on the dollar since Canada is a key exporter of oil.
BOND PRICES COOL OFF
Canadian bond prices were up across the curve but off earlier highs since the jobs data did nothing to suggest the Bank of Canada will have to rethink its comments earlier in the week that made no mention of pending interest rate cuts.
On Wednesday, the central bank left its key interest rate steady at 3 percent and issued a statement that gave no timing for when it might cut interest rates again.
"You have to think the Bank of Canada is breathing a sigh of relief and that its decision to remain on hold earlier this week has not been damaged by this report," said Lascelles. "This is a number that is consistent with that decision to keep rates steady."
The jobs report could sap demand for more secure assets like government debt and prompt a return to riskier asset like equities, which have fallen hard this week.
The two-year bond was up 2 Canadian cents at C$100.15 to yield 2.682 percent, while the 10-year gained 10 Canadian cents to C$106.65 to yield 3.439 percent.
The yield spread between the two-year and 10-year bond was 78.6 basis points, up from 77.0 basis points at the previous close.
The 30-year bond gained 31 Canadian cents to C$118.16 for a yield of 3.938 percent. In the United States, the 30-year Treasury yielded 4.236 percent.
The three-month when-issued T-bill yielded 2.42 percent, down from 2.43 percent at the previous close. (Editing by Frank McGurty)