UPDATE 2-Safe-haven euro zone bonds dented by Brexit but buffered by ECB

Germany's 10-year bond yield edged up towards zero percent on Thursday after Britain and Europe avoided a no-deal Brexit, while a signal from the European Central Bank that it will fight low economic growth and inflation boosted peripheral debt. European Union leaders early on Thursday gave Britain six more months to leave the bloc, meaning it will not crash out on Friday without a treaty to smooth its passage.

The news bought some relief to markets but the selloff in safe-haven assets such as German government bonds was limited as investors focused on the dovish message being sent from major central banks. "The decision on Brexit was no big surprise so market reaction was limited," said Daniel Lenz, rates strategist at DZ Bank. "There was a slight shift in tone from the ECB and even though they said yesterday that recession is unlikely, for the market there is a sense that the ECB's easy stance could last longer or become more intense."

Germany's 10-year bond yield was up 2 basis points at minus 0.01 percent, off Wednesday's one-week low. British gilt yields were around five-six bps higher on the day . On the other end of the spectrum, Greek government bond yields dropped across the curve, with 10-year yields hitting their lowest level in over 13 years as data showed Greek unemployment at its lowest level since July 2011.

Italian bonds also benefited, dropping three to five basis points across the curve. Draghi on Wednesday raised the prospect of more support for the euro zone economy if its slowdown persisted, saying the ECB had "plenty of instruments" with which to react.

And minutes from the Federal Reserve's March meeting released on Wednesday showed the Fed is likely to leave interest rates unchanged this year given risks to the U.S. economy. "The April ECB meeting had a dovish ring to it which, put in the context of the March dovish surprise and stabilisation of economic indicators, caught rates markets off guard," said Antoine Bouvet, a rates strategist at Mizuho in London.

"What really stood out was his (Draghi's) willingness to signal the ECB is studying whether NIRP (negative interest rate policy) side-effects need mitigating." Renewed talk about further ECB policy measures to lift economic growth, especially the notion of tiered interest rates, means speculation about euro zone rates is starting to build.

Eonia money market futures dated to the ECB's December meeting price in almost two basis points worth of rate cuts, which analysts say equates to roughly a 20 percent chance of a 10 basis point rate cut. "Since there is no new evidence that issuer limits could be raised, for QE (quantitative easing) to be restarted, the logical conclusion would be that rate cuts may have to be reconsidered in the future under an adverse scenario," said Pictet Wealth Management strategist Frederik Ducrozet, referring to the ECB's rules for asset purchases.

(Reporting by Dhara Ranasinghe, Additional reporting by Abhinav Ramnarayan; Editing by Andrew Cawthorne/Keith Weir)

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