* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout)
By Virginia Furness
LONDON, March 26 (Reuters) - Germany’s 10-year bond yields held below zero percent, just above 2-1/2-year lows, on Tuesday, weighed down by fears of global economic slowdown and uncertainty about the impact of a potentially chaotic Brexit on the euro zone.
Market sentiment remains pinned on a negative outlook for global growth. With Brexit woes deterring any major market bets, liquidity remains thin, keeping yields hovering around recent lows.
Concerns over anaemic growth have prompted a shift towards more accommodative monetary policy from the world’s most influential central banks, and government bond yields have sunk to multi-year lows in response.
Investors are also focused on Britain, where lawmakers are set to vote on Wednesday on various Brexit options that may indicate whether they agree a deal with closer ties to Brussels, an outcome most investors would welcome. But fears the UK will be pitched into a no-deal Brexit have not entirely faded either.
Cyril Regnat, rates strategist at Natixis, warned that a no-deal Brexit would cause Germany’s 10-year Bund yield to fall to minus 20 basis points, triggering “more flattening of the 20-30 year curve, and a very strong widening of credit indices”.
That, he said, would be likely to prompt a response from the European Central Bank.
“We would expect the ECB to do more. They won’t be able to normalise policy, and would start monitoring financial markets and perhaps restart the asset-purchase programme,” Regnat said.
Germany’s 10-year bond yield, the benchmark for the euro zone, fell to a low of -0.032 percent, close to the -0.033 low hit on Friday, though it ticked up as trading wore on and was at 0.016 percent towards close of trade.
In the United States too, 10-year yields rose off 15-month highs as world equity markets stabilised. The three-month to 10-year Treasury yield curve nevertheless remained inverted — often a leading indicator of recession.
Data showing housebuilding fell more than expected in February provided another reminder of the growth risks and of last week’s dovish pivot by the Federal Reserve.
In Germany too, there was disappointing economic data. Consumer morale deteriorated heading into April, a survey showed, suggesting that household spending might weaken in the second quarter.
Analysts said they did not expect any major uplift to Bund yields in the near future. Rabobank strategists, for example, noted declining inflation expectations as a factor keeping yields sub-zero.
A market gauge of long-term euro zone inflation expectations dropped below 1.40 for the first time since October 2016. .
In the rest of the euro zone too, bonds remained in demand. Italian 10-year yields fell 3 bps to 2.47 percent and Ireland raised 300 million euros in new inflation-linked bonds maturing in 2045, at a negative real yield of -0.05 percent. (Reporting by Virginia Furness, additional reporting by Sujata Rao; Editing by Catherine Evans)