Bonds, stocks rally, after Yellen emphasizes flexibility

NEW YORK (Reuters) - U.S. equities rose and bond yields fell after U.S. Federal Reserve Chair Janet Yellen said on Tuesday it would be several months before the Fed expects to boost interest rates, while European equity markets gained after Greece locked in a four-month extension of its financial rescue program.

Yellen said the Fed's policy-setting committee is considering interest rate hikes "on a meeting by meeting basis." She added, however, that a rate increase is not likely for at least the next couple of meetings, and that the first hike would not necessarily come after the Fed removes the word "patient" from its forward guidance.

Short-term rate futures have shifted market expectations modestly, with the first hike now expected in October, instead of September before Yellen's testimony. Expectations for a possible June increase have been reduced. Strategists said Yellen was giving the Fed more flexibility to raise rates later if necessary.

"It’s very cautious and very couched. She’s leaving all her options open as she should be," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

The greenback jumped initially but paired gains and was down 0.1 percent against a basket of currencies <.dxy>. U.S. 10-year Treasury yields initially rose to about 2.11 percent, but subsequently declined to 1.98 percent.

"They're trying to give themselves more flexibility without locking themselves into a commitment one way or the other, which in general can be perceived as being dovish," said Jonathan Rick, interest rate derivatives strategist at Credit Agricole in New York.

Wall Street stocks rose. The Dow Jones industrial average <.dji> gained 92.35 points, or 0.51 percent, to 18,209.19, the S&P 500 <.spx> gained 5.82 points, or 0.28 percent, to 2,115.48 and the Nasdaq Composite <.ixic> added 7.15 points, or 0.14 percent, to 4,968.12. The Nasdaq has posted gains in 10 consecutive sessions, the longest streak since July 2009.

Gold fell to near a seven-week low of just below $1,194 an ounce before recovering to $1,199.45. Expectations for rate hikes this year have curbed gold's safe-haven appeal in recent weeks.

European stocks gained for a sixth day after Greece's proposed reforms were approved by the Eurogroup, the euro zone's finance ministers. The proposals pull back key leftist measures and promise that the new government's spending on alleviating social distress will not derail its budget.

Greece's stock market <.atg>, which was closed on Monday, jumped nearly 10 percent, hitting a three-month high. Greek , Italian and Spanish bond yields all edged lower. The benchmark FTSEurofirst 300 index <.fteu3> rose 0.5 percent to a seven-year high.

Oil prices rebounded before slipping late in the day. U.S. crude was down 36 cents at $49.09 and Brent in London was off slightly at $58.71 a barrel.

Asian markets were higher overnight. Tokyo reached another 15-year peak and MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> ended flat.

(Additional reporting by Wayne Cole in Sydney, Manolo Serapio Jr in Singapore; and Alistair Smout in London; Editing by Larry King and Dan Grebler)