* Canadian dollar at C$1.2737, or 78.51 U.S. cents
* C$ hits highest since June 2016
* Two-year bond yield at highest since October 2013 (Updates market levels, adds comment)
By Solarina Ho and Fergal Smith
TORONTO, July 12 (Reuters) - The Canadian dollar surged to its highest level in more than a year against the greenback on Wednesday and key bond yields rallied on anticipation of more hikes to come after the central bank raised interest rates for the first time since 2010.
But concerns that the 25-basis-point rate increase would hit consumer spending, raise borrowing costs and hurt exporters weighed on some pockets of the stock market.
“We’re moving off generationally low rates,” said Paul Taylor, CIO of fundamental equities at BMO Asset Management Inc.
“The Bank of Canada rate decision was a bit of sobering news for the Canadian market.”
The rate increase was widely anticipated but the upbeat statement supported the view of more hikes in coming months, even though it said future moves would be guided by economic data given “continued uncertainty and financial system vulnerabilities.”
“It is a story about the (Canadian) dollar and can our exports compete,” said John Stephenson, president & chief executive at Stephenson & Company Capital Management. “The market is looking out there and asking will it hurt our competitiveness, hurt the (construction) sector in the economy that is hot.”
The loonie has soared some 6 percent since the Bank of Canada turned hawkish in June, while yield on the country’s 2-year bond has jumped nearly 0.5 percentage point. Data from the overnight index swaps market indicated a greater than 80 percent chance of another rate increase by December.
The Canadian dollar notched it biggest percentage gain since March 2016 and was last trading at C$1.2737 to the greenback, or 78.51 U.S. cents, up 1.4 percent.
The currency touched C$1.2681, its highest since June 23, 2016, while 2-year yields hit their highest since October 2013 at 1.201 percent.
In contrast, U.S. Treasury yields fell after Federal Reserve Chair Janet Yellen dampened expectations for a U.S. interest rate hike this year and in 2018.
Canada’s main stock index rallied nearly 1 percent in line with U.S. markets before the rate announcement but later retreated from session highs, also due in part to company news and seesawing crude oil prices. The Toronto Stock Exchange’s S&P/TSX composite index finished down 5.15 points, or 0.03 percent, to 15,143.99, reversing the session’s gains.
Some retail stocks fell on worries that Canada’s highly indebted consumers could feel squeezed by higher interest rates. Canadians owe C$1.67 for every dollar of income, a near-record high.
Canada’s biggest banks raised their prime lending rates in response to the central bank move. Higher rates are expected to boost banks’ profit margins.
Reporting by Solarina Ho and Fergal Smith; Editing by Meredith Mazzilli