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By Abhinav Ramnarayan
LONDON, June 26 (Reuters) - Greece's 10-year borrowing costs dropped to their lowest since 2009 after Moody's upgraded the country's credit rating on Friday, with yields approaching levels at which Athens might consider returning to the bond market.
The agency raised Greece's long-term issuer rating to 'Caa2' from 'Caa3' after euro zone governments extended a credit lifeline. It also changed the outlook to positive from stable.
"There was some speculation about a rating upgrade, but what was really a surprise was that positive outlook, giving a chance for another upgrade," said DZ Bank strategist Daniel Lenz.
The benchmark 10-year yield fell 8 basis points to 5.42 percent, its lowest since December 2009.
Sources told Reuters earlier this month that Greece would return to the bond market if the level dropped below 5 percent.
Two-year Greek yields were at their lowest since 2010.
Moody's cited the successful conclusion of bailout talks between Greece and the European Union, an improved fiscal performance and tentative signs of the economy stabilising as reasons for the upgrade.
The decision to assign a positive outlook was made on better prospects for a successful conclusion of Greece's third bailout, which in turn raised the likelihood of debt relief.
"Later repayment to official creditors would improve Greece's capacity to service debt held by private sector investors, to which Moody's ratings speak," the agency said in a note. (Reporting by Abhinav Ramnarayan, editing by John Stonestreet)