Pakistan's benchmark share index rose 1.5%, more than 900 points, in early trade on Wednesday, according to the Karachi stock exchange website, a day after two major political parties said they had reached a formal agreement to form a coalition government.

The agreement between Bilawal Bhutto Zardari's Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N) of three-time Premier Nawaz Sharif ended days of uncertainty and negotiations after an inconclusive election more than ten days ago.

The benchmark index had fallen more than 5% since the elections and the subsequent uncertainty around government formation.

Pakistan bonds recovered after three straight day of falls with all papers rising on the day. Its December 2027 bond was the biggest gainer, rising 2.58 cents, closely followed by the April 2031 bond which rose 2.54 cents.

Amreen Soorani, head of research at JS Global Capital said that the expectations of a 'reforms dividend' is back.

"The markets have been confident that recent reforms taken by the caretaker set up would be continued by the new government, and lead to a longer-tenor International Monetary Fund (IMF) programme - something the country needs right now," she added.

A caretaker government has been in place since August and is implementing agreements reached under the IMF loan programme.

Ahead of the bailout, Pakistan had to undertake a slew of measures demanded by the IMF, including revising its budget, a hike in its benchmark interest rate, and increases in electricity and natural gas prices.

Mohammed Sohail, CEO of Topline Securities, said that despite the deal between the two parties, all eyes will remain on who the new finance minister will be and how the new team will be able to negotiate a longer term IMF programme once the current deal expires in March. (Reporting by Ariba Shahid; Writing by Sudipto Ganguly; Editing by Tom Hogue and Kim Coghill)