* Ten-year yields fall 26 bps to 7.37 pct
* Cost of insuring Greece against default tumbles
* Greek stocks best performers in euro zone
* Eurogroup expected to sign off bailout loans on Tuesday
By John Geddie
LONDON, May 23 (Reuters) - Greek government borrowing costs fell to a six-month low on Monday after Athens agreed a series of reforms that should pave the way for an agreement on bailout loans and debt relief talks this week.
Ten-year bond yields fell 26 basis points to 7.37 percent , levels not seen since late November.
The cost of insuring Athens’ debt against default, as measured by five-year credit default swaps, also fell to a six-month low, while the country’s stocks outperformed all other euro zone markets to rise 1 percent.
Lawmakers in Athens approved a series of measures including tax increases and a contingency mechanism of spending cuts, a package it hopes will help unlock the funds it needs to pay upcoming loans and increasing state arrears.
Hundreds of demonstrators rallied outside parliament to protest against the reforms.
Euro zone finance ministers meet on Tuesday to sign off bailout loans for Athens and are likely to forge a tentative and highly conditional plan to help the country to reprofile its debt burden to make it more sustainable.
Commerzbank strategists said a thumbs up from the Eurogroup may also see the European Central Bank (ECB) restore a waiver for Greek government bonds that could deliver cheaper funding to its troubled banks, and even make Athens’ bonds eligible for quantitative easing.
“It seems to all be falling into place for Greece,” Commerzbank strategist Rainer Guntermann said.
All other euro zone yields tracked oil prices lower on Monday with strategists pointing to a lack of upcoming bond supply and weaker equity markets which should keep downward pressure on yields.
Bond yields tend to trade broadly in line with crude prices, which shed over 1 percent, as cheaper oil dims the outlook for inflation.
Strategists also pointed to the light calendar of issuance this week as another supportive factor for bonds with only Germany set to sell 1 billion euros of 30-year bonds and demand propped up by 3.5 billion euros of coupon payments from France.
“The lack of supply...should be supportive for bonds,” Mizuho strategist Peter Chatwell said.
A weak opening for euro zone equities, weighed down by losses in commodity stocks and the slump in shares of German drugsmaker Bayer after it made an offer for Monsanto, was also seen increasing demand for safer fixed income assets.
Euro zone business growth, meanwhile, unexpectedly slowed to a 16-month low in May, a survey published on Monday showed, keeping the onus on the ECB’s ultra-easy monetary policy.
Benchmark German 10-year yields fell 3 bps to 0.14 percent, clawing back some ground after their biggest weekly rise in a month on growing talk of another hike in U.S. interest rates. (Editing by Jon Boyle)