By Karen Brettell NEW YORK, Aug 27 (Reuters) - U.S. government debt yields fell o n M onday as investors focused on whether Federal Reserve Chairman Ben Bernanke will hint at a third bond purchase program when he speaks at the end of the week. Investors are awaiting Bernanke's highly anticipated speech on Friday in Jackson Hole, Wyoming. He has used this event the previous two years to flag the Fed's intention on more easing. Expectations that the Fed will announce a third round of quantitative easing, known as QE3, have increased since minutes from the central bank's August meeting, released last week, showed that Fed action might be imminent unless the economy showed significant improvement. "After the minutes last week there is a pretty good assumption that Bernanke will allude to some sort of QE3," said Jason Rogan, director of Treasuries trading at Guggenheim Partners in New York. "If he doesn't talk about QE3, that would presumably disappoint the markets," Rogan added. If Bernanke does not hint at new bond purchases, bond yields could climb back to recent yield support levels, said Rogan. Benchmark 10-year note yields have fallen from three-month highs of 1.86 percent early last week, the 200-day moving average and a level where there is a fair amount of buying support for the debt. Yields fell to 1.67 percent on Monday, down from 1.69 percent at Friday's close. Alternatively, the absence of new stimulus could support Treasuries if investors focus on the potential inflation impact of a new bond-buying program. "If the Fed does more QE then people expect inflation to go up," said Ira Jersey, interest rate strategist at Credit Suisse in New York. "The fact that oil is coming off even though we have a hurricane building in the gulf is helping rates rally here on the near-term inflation expectations." Rising inflation typically harms bond prices, as rising costs erode the value of the investment. Oil futures fell, reversing early gains, as investors worried that Tropical Storm Isaac may harm demand and as western governments mulled the release of strategic reserves to calm oil prices. A gloomy assessment of the business climate in Germany added a bid for safe-haven U.S. bonds. Business sentiment dropped for a fourth month in a row as the euro zone crisis and a slowdown in China took their toll. Markets have also been unsettled by rising talk of a Greek euro zone exit, after a conservative ally of German leader Angela Merkel said the country should leave the currency bloc by next year. The Fed also bought $1.83 billion in Treasuries due between 2036 and 2042 from $4.24 billion submitted o n M onday, as part of its Operation Twist program designed to lower long-term borrowing rates. The Treasury this will week sell $99 billion in new coupon-bearing debt, comprising $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

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