* Canadian dollar at C$1.2760, or 78.37 U.S. cents
* Chance of October rate hike rises to near 70 percent
* Bond prices lower across the yield curve
* 10-year yield reaches its highest since December 2014
TORONTO, July 13 (Reuters) - The Canadian dollar edged lower on Thursday against its U.S. counterpart, but held on to most of its sharp gains from the day before as domestic bond yields rose in anticipation of additional rate increases from the Bank of Canada. The loonie surged to its highest in more than a year on Wednesday, scoring its biggest gain since March, after the central bank raised interest rates for the first time since 2010. Chances of another interest rate hike by October have increased to nearly 70 percent from roughly one-in-two before the rate decision, data from the overnight index swaps market shows. The Canadian dollar has also benefited from comments by U.S. Federal Reserve chair Janet Yellen on Wednesday, which markets took as a signal the U.S. central bank may go softer with monetary policy tightening than it has previously insisted. The gap between Canada's 2-year yield and its U.S. equivalent narrowed on Thursday by 3.7 basis points to a spread of -12.2 basis points, its narrowest since Aug. 4.
At 9:09 a.m. ET (1309 GMT), the Canadian dollar was
trading at C$1.2760 to the greenback, or 78.37 U.S. cents, down 0.1 percent. The currency traded in a range of C$1.2722 to C$1.2771. It touched on Wednesday its strongest since June 2016 at 1.2681. Prices of oil, one of Canada's major exports, rose even as the International Energy Agency said the oil market could stay
oversupplied for longer than expected. U.S. crude prices
were up 0.33 percent at $45.64 a barrel. New housing prices in Canada climbed 0.7 percent in May, more than economists' forecasts for a 0.3 percent increase, as prices continued to rise in the hot markets of Toronto and Vancouver, Statistics Canada said. Canadian government bond prices were lower across the yield
curve, with the two-year down 7.5 Canadian cents to yield 1.237 percent and the 10-year falling 40
Canadian cents to yield 1.924 percent. The 10-year yield reached its highest intraday level since December 2014 at 1.927 percent.
(Reporting by Fergal Smith; Editing by Bernadette Baum)