* Euro zone exits from 18-month recession * U.S. July producer price index unchanged, misses forecast * Fed buys $1.509 billion long-dated Treasuries * St. Louis Fed chief Bullard to speak about economy By Richard Leong NEW YORK, Aug 14 (Reuters) - U.S. Treasuries yields held near two-year highs on Wednesday as bargain-buying and muted inflation data soothed worries that benchmark yields would soon make a run toward 3 percent. A bond market selloff on Monday and Tuesday led benchmark yields to post their biggest two-day increase since early July on speculation that signals of U.S. and European economic growth might spur the U.S. Federal Reserve to dial back its bond-purchasing stimulus program as early as September. But on Wednesday weaker-than-expected readings on U.S. producer prices in July fanned expectations that inflation would stay below the Fed's target, keeping the central bank from a quick cut to its $85 billion a month in bond purchases. "People are trying to figure out the timing on Fed's tapering. People are reacting to every piece of economic data," said Brian Rehling, chief fixed-income strategist at Wells Fargo Advisors in St. Louis, Missouri. A Reuters poll released on Wednesday showed a majority of economists expect the Fed to pare bond purchases at its Sept 17-18 policy meeting. On Wednesday, the Fed bought $1.509 billion of government debt that will mature February 2037 to August 2042, which was its latest purchase for its third round of quantitative easing, or QE3. Benchmark 10-year Treasury notes rose 1/32 in price to 98-4/32 for a yield of 2.715 percent, down 0.6 basis points from late on Tuesday. The 10-year yield had touched 2.730 percent earlier, on stronger-than-expected European growth data, reaching a level just 2.5 basis points below the 23-month high set in early July, according to Reuters data. The 30-year bond was up 6/32 in price on the day with its yield at 3.748 percent, down 1.1 basis points from Tuesday's close. Earlier, the 30-year yield was higher, and about 3 basis points below a near two-year peak set on July 10. The Treasuries' sell-off on Monday and Tuesday resulted from investors exiting bullish bets that bond prices would rise after last week's $72 billion U.S. Treasury debt sale. "In the last few days, some people were caught off guard. Some longs were forced out of the market," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Treasuries fared slightly better than German bunds with their 10-year yield spread narrowing slightly to 88.75 basis points after second-quarter data showed the economies of Germany and France grew faster than expected, pulling the euro zone out of a 1-1/2 year-long recession. "Europe was not as doom-and-gloom as a year ago. Our economy is also a bit better," Cantor's Lederer said. After French and German economic growth data was released early in the European morning, Treasuries bond prices slumped, prompting some bargain-buying. The buying picked up after the U.S. government said producer prices were flat in July, which suggested to analysts that domestic inflation will likely stay below the Fed's 2 percent target in the foreseeable future.. St. Louis Fed President James Bullard, who is a voter on the Fed's policy-setting group this year and who has expressed reservations about reducing bond purchases too soon, will speak about the economy at an event in Paducah, Kentucky, scheduled at 2:15 p.m. EDT (1815 GMT). He told Reuters Insider on Aug. 2: "We need to see some indication that growth is going to pick up in the second half before we can be confident things are improving in the way we need." Even if the Fed starts to scale back its bond purchases, some analysts don't anticipate benchmark yields will rise much further from current levels as economic growth will likely hover near the 2 percent level at least for the rest of the year. "I don't think we are going to see a run toward 3 percent. We need to see much better data," said Wells Fargo's Rehling.