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CANADA FX DEBT-C$ snaps back to near two-year high after GDP surprise

(Adds trader comment, speculative data, updates prices)

* Canadian dollar at C$1.2443, or 80.37 U.S. cents

* Canada's economy grows 0.6 percent in May

* Bond prices lower across the yield curve

* Two-year yield touches its highest intraday since April 2012

TORONTO, July 28 (Reuters) - The Canadian dollar resumed its rally to two-year highs against the U.S. currency on Friday, as surprisingly robust domestic economic data boosted expectations the Bank of Canada will again raise interest rates. The yield on two-year Canadian bonds touched its highest in more than five years and is fast approaching the equivalent U.S. Treasuries as investors adjust to a more hawkish Canadian central bank coupled with U.S. political uncertainty and a toning down of expectations for U.S. hikes. Canada's gross domestic product expanded 0.6 percent in May on growth in the energy, manufacturing and retail trade sectors, Statistics Canada said, exceeding economists' forecasts for a 0.2 percent rise. "The GDP data today shocked everyone," said David Bradley, director of foreign exchange trading at Scotiabank. "It's just another piece of the puzzle that is adding to the Canadian dollar strength we've seen recently." The currency has gained almost 10 percent since May, and added 0.7 percent on the week, despite a retreat on Thursday after upbeat U.S. durable goods and trade data.

At 4 p.m. ET (2000 GMT), the Canadian dollar was

trading at C$1.2443 to the greenback, or 80.37 U.S. cents, up 0.9 percent. It traded between C$1.2420 and C$1.2567 during the session, after touching its strongest in more than two years at C$1.2414 during Thursday's session. Speculators increased bullish bets on the loonie, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net long positions rose to 26,613 contracts as of July 25 from 8,043 contracts a week earlier. The Bank of Canada raised rates earlier this for the first time in nearly seven years. Chances of another rate hike as soon as September have doubled since last week to 40 percent, while there is nearly a four-in-five chance of a hike by October, data from the overnight index swaps market showed. Adding to support for the loonie, prices of oil, one of Canada's major exports, reached fresh two-month highs as investors digested signs of an easing oversupply picture.

Canadian government bond prices fell across the yield

curve, with the two-year down 5.5 Canadian cents to yield 1.327 percent and the 10-year falling 25

Canadian cents to yield 2.025 percent. The two-year yield touched its highest intraday since April 2012 at 1.358 percent, while the gap between it and its U.S. counterpart narrowed by 3.8 basis points to a spread of -2.4 bps.

(Additional reporting by Fergal Smith; Editing by W Simon and Richard Chang)