* Fund managers buy bonds as 10-yr yields test 2 pct yields
* Dovish Fed speakers reduce tapering expectations
* Bernanke testimony on Wednesday seen as key event
* U.S. Fed purchases $3.31 bln medium-term government debt
By Karen Brettell
NEW YORK, May 21 (Reuters) - U.S. Treasuries ended stronger on Tuesday after buyers stepped back in, attracted by higher yields, and after two voting members of the U.S. Federal Reserve struck a dovish tone on the economy, reducing expectations the U.S. central bank is close to tapering its bond purchases.
Fund managers bought bonds after benchmark 10-year Treasury yields bumped up against key support levels of 2 percent, at the same time as mortgage-backed debt staged a dramatic turnaround to reverse earlier losses.
The switch in sentiment occurred just before St. Louis Fed Bank President James Bullard took a more dovish tone than he has previously in a speech in Frankfurt, saying the U.S. recovery has been disappointing and he can not see a good case for tapering unless inflation increases.
A similar sentiment was expressed by New York Fed President William Dudley, who said the economy's ability to weather lower government spending and higher taxes in the coming months will be key to the U.S. central bank's decision on whether to reduce bond purchases.
"The market turned around before the speeches as real money buying came in," said Tom Tucci, head of treasuries trading at CIBC in New York.
"Then both commentaries tell you that Bernanke is not going to tip his hand that he is going to be withdrawing accommodation tomorrow in his testimony. I think that reinforced what was already happening," Tucci added.
The comments took center stage ahead of Wednesday's congressional testimony from Fed Chairman Ben Bernanke, which is being keenly awaited for any clues on whether the central bank might curb its bond purchases due to signs of an improving labor market.
Ten-year note yields have surged almost 40 basis points this month as some traders increase expectations that an improving economy will lead the Fed to reduce its bond purchases before the end of the year, sooner than many had expected.
The 10-year notes were last up 4/32 in price to yield 1.95 percent. The yields have jumped from as low as 1.61 percent on May 1.
Others see the likelihood of the Fed cutting back on stimulus as less likely as long as inflation remains subdued, and the economy stays fragile.
"Bernanke is not likely to give too may clues as to the timing and pace of changes in purchases. September is when they are likely to make their first move, though I think it will be rather modest when they finally do it," said Ira Jersey, an interest rate strategist at Credit Suisse (NYSE: CS - news) in New York.
Jersey sees much of this month's yield increases as a correction of the rally to the 1.61 percent area, when bonds were overbought.
He sees 10-year yields now falling to around 1.75 percent in the coming six weeks, noting the risks that manufacturing may remain weak and depending on this month's employment number.
The Fed bought $3.31 billion in Treasuries that mature from August 2020 to February 2023 on Tuesday as part of its latest bond purchase program.
It will buy between $1.25 billion and $1.75 billion in bonds due from 2036 to 2043 on Wednesday.
Bernanke will testify about the economy before a congressional panel on Wednesday at 10 a.m. EDT (1400 GMT).
Also on Wednesday, the release of minutes of the Fed's last policy-setting meeting, on April 30-May 1, may provide further insights into the Fed's thinking. The minutes are to be released at 2 p.m. EDT on Wednesday. (Additional reporting by Richard Leong; Editing by Neil Stempleman)