LONDON: Greek bond yields fell to their lowest in more than a year and local stocks rose on Tuesday after Athens reached an agreement with its lenders on financial reforms early on Tuesday, removing a major obstacle holding up fresh bailout funds for the cash-starved country.
The yield curve returned to normal, a sign of easing fears of another restructuring of privately held government debt.
Ten-year yields fell closer to 7 percent, a level with psychological significance in the euro zone - several countries were forced to seek bailouts after their borrowing costs surged above it.
Athens agreed to a new aid programme worth up to 86 billion euros earlier this year, but payment of part of an initial tranche had been held up over a dispute over regulations on home foreclosures and handling tax arrears.
Finance Minister Euclid Tsakalotos said Tuesday's agreement meant Greece's parliament could now ratify the set of reforms to law and that deputy euro zone finance ministers would on Friday endorse the deal.
That would allow a 2 billion-euro aid disbursement and about 10 billion euros in recapitalisation aid to the country's four main banks.
It would also pave the way for European Central Bank to buy Greek bonds as part of its trillion-euro stimulus scheme.
The ECB buys mainly investment grade government debt, but it can buy junk-rated debt like Greece's if the country is deemed to be implementing a bailout programme.
"I can't see the rally in Greek bonds stopping any time soon," said DZ Bank strategist Daniel Lenz. Greek 10-year yields fell to 7.07 percent, their lowest since October 2014.
They are about a third what they were in July, when bailout negotiations between Athens and its euro zone partners reached a critical point and many feared Greece would be forced out of the single currency.
Two-year yields were down half a point at 6.10 percent, having reached almost 60 percent in July. Two-year yields had been trading above 10-year yields for most of 2015, a phenomenon common in countries considered close to default.
Greece has been keen to complete its first assessment of the bailout package so it can start talks with the European Union and the International Monetary Fund on debt relief.
"All this suggests that next year, Greece will start discussions with the creditors on debt relief.
If agreed, it would allow the ECB to include Greece in its QE programme by mid-next year, which would be very bullish for Greece," said Athanasios Vamvakidis, head G10 FX Strategy Europe at Bank of America Merrill Lynch.
Greek stocks rose just over 2 percent.
Most euro zone bond yields were flat to slightly lower after European Central Bank chief economist Peter Praet said inflation expectations were still fragile and downside risks may have increased in light of the attacks in Paris.
German 10-year Bund yields, the benchmark for the euro zone borrowing costs, were steady at 0.53 percent having fallen to their lowest level in two weeks at 0.52 percent.
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