Government bonds rallied on Thursday after the head of the US central bank stressed there would be no rapid changes to monetary policy for the world’s largest economy.

Speaking at the Economic Club of New York on Wednesday afternoon, Jay Powell, the Federal Reserve chair, underscored the importance of “patiently accommodative” monetary policy to boost the pandemic-ridden US labour market.

The yield on the two-year US Treasury bond briefly slipped below 0.1 per cent for the first time on Thursday, according to Bloomberg data, before steadying at about 0.11 per cent.

The benchmark 10-year Treasury yield was stable at 1.15 per cent, although European bonds were in demand. Germany’s 10-year bond yield dropped 0.03 percentage points to minus 0.46 per cent. The yield on the equivalent UK bond fell the same amount to 0.46 per cent.

Prospects for a strong economic rebound later in the year had stoked expectations of higher inflation, encouraging fears of the Fed dialling back its $120bn-plus of monthly asset purchases. This monetary stimulus has supported global financial markets throughout the pandemic by flooding the system with cash that institutional investors have then spent on corporate bonds and stocks.

But Powell moved to damp down inflation expectations on Wednesday by saying that any rise in prices would be transient and unlikely to affect monetary policy while the labour market remained “very far” from being strong.

“This is the Fed signalling they will keep things the same until unemployment gets back to pre-Covid levels,” said Remi Olu-Pitan, multi-asset fund manager at Schroders. “Despite fears of inflation, they are using the labour market to justify very loose policy.”

Market forecasts of US inflation remain elevated as President Joe Biden’s $1.9tn stimulus bill is debated in Congress.

The 10-year break-even rate, a measure of US inflation expectations derived from the prices of inflation-protected bonds, is running at about 2.2 per cent. The gold price, at $1,842 on Thursday, has also risen about 3 per cent in the past week as investors bought the metal as a hedge against inflationary pressures.

“Markets have been worried about inflation but what we now have from the Fed is that this is not their primary concern,” Olu-Pitan said.

On Wall Street, the S&P 500 index gained 0.2 per cent in early dealings while the tech-focused Nasdaq Composite rose 0.5 per cent. This followed data showing new unemployment claims in the US fell slightly to 793,000 last week, from 812,000 the week before. Roughly 10m fewer Americans are employed compared to a year ago, however.

In Europe the Stoxx 600 benchmark added 0.3 per cent in the afternoon, while London’s FTSE 100 slid 0.1 per cent.

The dollar, as measured against a basket of currencies, edged fractionally lower.

Brent crude, the international oil marker, fell 0.2 per cent to just above $61 a barrel after the latest industry data showed falling inventories as oil producers looked to clear the surplus built up during the pandemic.

Oil prices have been on a strong run through the turn of the year, while the prices of industrial metals have also firmed. London-traded platinum rose as much as 2.2 per cent on Thursday to $1,268 an ounce, a six-year high.

Nadège Dufossé, head of cross-asset strategy at fund manager Candriam, said she was adding commodities to her portfolios in case the end of coronavirus lockdowns created a “demand shock” that drove inflation expectations higher and caused a sell-off of bonds and equities. “To protect your portfolio from this, you really want to be in assets that would definitely benefit from a surge in consumer demand,” she said.