* Canadian dollar bounces off last week's 3-year low
* Improved market sentiment behind currency's rally
* Bond prices rattled as equity market surge
By Frank Pingue
TORONTO, Oct 14 (Reuters) - The Canadian dollar rose versus the U.S. dollar on Tuesday as easing worries of a global recession, coupled with higher commodity prices, allowed it to recoup a chunk of the massive losses it recorded last week.
Canadian bond prices, with no Canadian economic data to consider, were down across the curve as the S&P/TSX composite index .GSPTSE shot 18 percent higher at the open on news of a rescue plan for U.S. banks.
At 9:55 a.m. (1355 GMT), the Canadian unit was at C$1.1460 to the U.S. dollar, or 87.26 U.S. cents, up from C$1.1808, or 84.69 U.S. cents, at Friday's close. The Bank of Canada did not provide a closing level for the currency on Monday because it was the Thanksgiving Day holiday in Canada.
The rally in the Canadian dollar, the bulk of which occurred on Monday, lifted it comfortably off the 82.41 U.S. cent level that it tumbled to on Friday, which marked the currency's lowest level in more than three years.
"Last week, markets just became absolutely irrational and the worst-case scenarios for global growth seemed increasingly likely," said David Watt, senior currency strategist at RBC Capital Markets.
"But over the weekend, rightly or wrongly, the market seemed to be under the view that we finally have had the dramatic move which has helped dissipate the fear that the global financial sector was going to implode and take the global economy with it."
Helping to boost market sentiment was news that the U.S. Treasury Department will inject $250 billion of capital in major U.S. banks to help stabilize the financial system and unfreeze lending.
But despite the turnaround in market sentiment, Watt said the global economy still faces an intense challenge going forward, However, he added that worst-case scenarios seem to be off the table and that has allowed a number of currencies to erase what he called "irrational" selloffs last week.
The Canadian dollar fell 8.4 percent last week as fears of a global recession and dropping demand hammered commodity prices. But commodities turned around at the start of this week, which is a positive for the Canadian dollar since Canada is the biggest supplier of oil to the United States, and commodities make up around half of Canadian exports.
BONDS PINNED LOWER
Canadian bond prices were down as investors raced back into Canadian equity markets to play catch-up with the Dow Jones industrial average .DJI and the Standard & Poor's 500 Index .SPX, which each surged in the previous session while Canada's stock market was closed for the Thanksgiving Day holiday.
The Toronto Stock Exchange's main index jumped 18 percent at the open on Tuesday in a broad-based rally that erased last week's 16-percent slide in a matter of minutes.
Michael Gregory, senior economist at BMO Capital Markets, said the sliding U.S. bond market, coordinated efforts from central banks to expand liquidity and the rebound in the stock market all contributed to the slide in bond prices.
"We've taken a step back from the precipice," said Gregory. "I think bonds will revisit some lower levels."
Earlier on Tuesday, the Bank of Canada announced a series of "exceptional liquidity" measures to shore up the Canadian financial system and said it could take more steps if needed.
The bank said it would offer C$10 billion in liquidity to money markets on Oct. 15 through a deal to buy securities and then resell them 27 days later.
The Canadian overnight Libor rate LIBOR01 was 3.625 percent, down from 3.725 percent on Friday.
Friday's CORRA rate CORRA= was 2.5042 percent, up from 2.5026 percent on Thursday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond was down 21 Canadian cents at C$100.90 to yield 2.313 percent. The 10-year bond slid 33 Canadian cents to C$103.37 to yield 3.827 percent.
The yield spread between the two-year and the 10-year bond moved to 119 basis points from 128 basis points at the previous close.
The 30-year bond dropped 70 Canadian cents to C$111.50 to yield 4.297 percent. In the United States, the 30-year Treasury yielded 4.262 percent. (Editing by Peter Galloway)