Steel posted his second consecutive 5-under 67 and is alone in second at minus-10. Mike Grob carded a 4-under 68 and is tied for third place with Andrew Barnes, who shot a second-round 66, at 9-under-par 135.
McDonald, who turns 55 on Saturday, drained a 20-foot birdie putt at the second hole. On the par-5 fourth, McDonald hit a horrible tee shot then laid up short of the green. He hit a sandwedge to 12 feet and converted the birdie putt.
McDonald, who has not played at Del Rio Country Club in 34 years, struggled in the middle of his round. He made the turn at 3 under par and collected another birdie, but vaulted to the top of the leaderboard with his play on the final holes.
He tallied a birdie at the 15th, then added another on 17, but his best play of the day came at No. 18. McDonald had 125 yards to the hole and hit a 9-iron before losing sight of his ball on a slope on the green. What McDonald did not see was his ball falling into the cup for an eagle-2.
'I knew I hit it well, but I lost it on the green and thought it spun right of the hole,' admitted McDonald, who is in the field this week on a sponsor's exemption. 'Then everyone started yelling. It ended up being a lot better than I had hoped for.'
McDonald has a chance at a Canadian Tour record if he hangs on over the weekend. At 55 he would become the oldest winner in tour history, besting the record of Ray Stewart, who won the Telus Edmonton Open in 1999 at the age of 45.
'I'll start thinking about that if I am leading going into Sunday,' he said. 'I'm not thinking about winning right now. There is a lot of golf between now and then. I didn't come in here with any expectations. I'm just going to go out there and have some fun.'
Stuart Anderson, the first-round leader, managed a 2-under 70 and shares fifth place with Matt Seppanen (65) and Ryan Miller (68) at 8-under-par 136.
Sixty-two players made the cut at 1-under-par 143.