Eurozone government bond yields pushed lower on Monday as the most inconclusive German election in post-war history fuelled doubts about the pace of reform in the eurozone’s largest economy.

Both Angela Merkel, the challenger from the Christian Democratic Union, and Chancellor Gerhard Schröder of the Social Democratic party were left claiming victory and the right to form a new government.

Investors tend to buy government bonds during times of uncertainty while selling off riskier assets. So while bond prices were moving higher, pushing yields lower, European stocks were weaker and the euro came under some pressure.

In late afternoon trading in London, the benchmark 10-year German Bund yield was 5.3 basis points lower at 3.082 per cent and the yield on the two-year Schatz was down 3.7bp at 2.239 per cent.

But the focus is set to turn quickly to today’s US Federal Reserve meeting – the first since Hurricane Katrina hit – to see whether it results in an 11th consecutive interest rate hike to 3.75 per cent. Investors will also focus on the accompanying policy statement.

Markets had initially been uncertain about the prospect of further monetary tightening following Katrina and its impact on energy prices and growth. But James Knightley at ING Financial Markets, said: “Soothing comments from Fed officials and the prospect of substantial relief and rebuilding spending suggest that the impact on activity, while clearly negative in the short-term, could actually be positive from late Q4 onwards and therefore actually add to inflationary pressures.”

Ahead of the meeting, US Treasuries were higher in late trading in New York. The yield on the 10-year bond fell 2.7bp to 4.250 per cent, and the two-year note yield slipped 4.6bp to 3.932 per cent.

US traders were also keeping a close eye on turbulent weather in the waters off southern Florida, where Tropical Storm Rita was expected to reach hurricane strength. Concerns that the storm could end up on a collision course with the devastated US Gulf coast added to the spike in bond prices, which reversed several days of declines.

Meanwhile in the UK, gilts followed the eurozone market higher, with the yield on the 10-year gilt falling 2.8bp to 4.224 per cent and the two-year gilt yield losing 2.9bp to 4.179 per cent.

The Japanese government bond market was closed for holiday.