CANADA FX DEBT-C$ strengthens with oil price, yield spreads narrow

* Canadian dollar at C$1.3242, or 75.52 U.S. cents

* Loonie on track for 1.7 percent gain this week

* Bond prices lower across the yield curve

* 2-year spread vs Treasuries hits narrowest since Feb. 24

TORONTO, June 16 (Reuters) - The Canadian dollar strengthened on Friday against its U.S. counterpart as oil prices rose, while the gap between Canadian and U.S. bond yields narrowed further after the Bank of Canada signaled this week that higher interest rates lie ahead. The 2-year spread narrowed 2.7 basis points to -41.6 basis points, its smallest gap since Feb. 24, as Canadian government bonds underperformed their U.S. counterparts in anticipation of a rate hike from Canada's central bank this year. Chances of a rate increase by December have surged to 90 percent from less than one-in-four before stronger-than-expected jobs data one week ago. Prices of oil, one of Canada's major exports, edged up from 2017 lows but remained on track for a fourth consecutive week of losses because of excess supplies.

U.S. crude prices were up 0.79 percent at $44.81 a


At 9:24 a.m. ET (1324 GMT), the Canadian dollar was

trading at C$1.3242 to the greenback, or 75.52 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.3222 to C$1.3272. It touched its strongest in 3-1/2 months on Wednesday at C$1.3165, while it is on track for a 1.7 percent advance this week, its biggest since early December. Gains for the loonie came as Canadian lender Home Capital

Group Inc took steps towards recovery by agreeing to

settle a regulatory investigation and lining up new funding.

Investors have fretted over how the near-collapse of the company could affect the country's real estate market. Foreign investment in Canadian securities slowed in April as investors scooped up bonds but sold their equities holdings, data from Statistics Canada showed. International investors bought C$10.60 billion in Canadian securities in the month, while Canadians reduced their holdings in foreign securities by C$9.87 billion after four consecutive months of acquisitions. In other domestic data, lending to small Canadian businesses picked up in April, suggesting growth in the broader economy was gaining momentum. The PayNet Small Business Lending index rose to 120.1 from 118.7 in March. Canadian government bond prices were lower across the yield

curve, with the two-year down 0.5 Canadian cent to yield 0.915 percent and the 10-year falling 8

Canadian cents to yield 1.540 percent. On Thursday, the 2-year yield touched its highest in nearly 2-1/2 years at 0.937 percent.

(Reporting by Fergal Smith; Editing by Bernadette Baum)