Nov. 16 (Bloomberg) -- Treasuries rose, snapping the biggest two-day decline in almost two years, after Federal Reserve Bank of New York President William Dudley said the central bank’s bond purchases won’t cause an inflation problem. Benchmark 10-year yields jumped 31 basis points during the previous two trading days, the most since a back-to-back surge of 33 basis points in January 2009. Fed Vice Chairman Janet Yellen said the central bank isn’t trying to weaken the dollar or push the inflation rate higher than 2 percent. Economists said a U.S. report due tomorrow will show consumer price- increases are slowing. Industrial production was unchanged in October, weaker than forecast. “There’s been a tremendous amount of buying on the back of comments made by Dudley and Yellen saying the Fed has the right view and QE2 is needed,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “Any kind of speculation the Fed will back off QE2 is unfounded.” Yields on 10-year notes fell seven basis points to 2.9 percent as of 9:18 a.m. in New York, according to data compiled by Bloomberg. The 2.625 percent security due in November 2020 advanced 18/32, or $5.63 per $1,000 face amount, to 97 21/32. Dudley was responding to criticism that the Fed’s plan to add $600 billion to the economy by buying Treasuries will lead to higher prices for consumers. “People do not understand clearly” that “we can have an enlarged balance sheet and not have a long-term inflation problem,” he said in an interview with CNBC. Industrial Production Factory production in the U.S. increased in October by the most in three months, signaling industries continue to support the U.S. economic recovery. Manufacturing rose 0.5 percent after a 0.1 percent increase in September that was previously reported as a 0.2 percent drop, figures from the Federal Reserve showed today. Total production was little changed, restrained by the biggest drop in utility use in six months that was probably caused by unseasonably mild temperatures last month. The producer price index climbed 0.4 percent from the prior month, Labor Department figures showed today in Washington. Economists projected a 0.8 percent rise in October, according to the median estimate in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, decreased 0.6 percent, the most since July 2006. “The PPI is telling you there’s very little inflation in the system,” Guggenheim Capital’s said. “That’s the underlying theme and that’s why the Fed is commencing this QE2 program.” Treasuries tumbled yesterday as a group of analysts urged the Fed to halt bond purchases. John Taylor, the Stanford University professor who created a monetary-policy formula used by the Fed, was among the group of 23 who signed the open letter to central bank Chairman Ben S. Bernanke. Another Fed Governor voiced support for the latest purchase program. The bond-buying program is justified because of low costs in the economy and 9.6 percent unemployment, Yellen said in an interview with the Wall Street Journal that the newspaper said was conducted last week. The central bank is scheduled to purchase $4 billion to $6 billion of securities maturing from May 2012 to May 2013 today under the program, according to its website. --With assistance from Wes Goodman in Singapore and Cordell Eddings in New York. Editors: Paul Cox To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Source