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UPDATE 1-Recession fears, Brexit keep German 10-year Bund yields below zero

Virginia Furness

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates pricing, adds details)

LONDON, March 26 (Reuters) - Germany's 10-year bond yield remained near 2-1/2-year lows at below zero percent on Tuesday as fears of global economic slowdown continued to dictate investment strategies and investors struggled to make sense of the blizzard of Brexit headlines.

Market sentiment remains pinned on a negative outlook for global growth, despite a surprising rise in German business morale on Tuesday. With Brexit woes deterring any major market bets, liquidity remains thin, keeping yields hovering around recent lows.

British lawmakers voted to take control of parliament for a day from Prime Minister Theresa May, meaning they should now vote on various Brexit options on Wednesday. That should indicate whether they can agree on a deal with closer ties to Brussels, which most investors would welcome.

"While this does not resolve the current Brexit impasse, it is a step in the right direction," wrote Berenberg economist Kallum Pickering in a note. "... more power for parliament contains the risk of a no-deal Brexit."

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.

Brexit concerns are also doing their bit to keep the Bund yield low.

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 likely 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 rose as trading wore on and was last up 1.7 basis points on the day to -0.009 percent.

In the U.S., a key leading indicator of recession -- the U.S. yield curve -- inverted further on Monday.

INVERTED CURVE

The U.S. 10-year Treasury yield fell to its lowest since December 2017, causing the curve between three-month bills and 10-year notes to invert further as investors evaluated last weeks dovish pivot by the Federal Reserve.

Analysts do not see any major uplift to Bund yields in the near future.

Rabobank strategists note that a repricing of the Bund above zero is unlikely because inflation expectations remain low.

A market gauge of long-term euro zone inflation expectations dropped below 1.40 for the first time since October, 2016 .

There was more disappointing German data on Tuesday.

German consumer morale deteriorated heading into April, a survey showed, suggesting that household spending might weaken in the second quarter.

(Reporting by Virginia Furness, editing by Larry King and Ed Osmond)