Treasuries rise ahead of Bernanke

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NEW YORK (CNNMoney) -- U.S. Treasury yields eased Thursday as investors turned cautious ahead of a highly-anticipated speech by Federal Reserve chairman Ben Bernanke.

Investors were also rattled by rumors that ratings agencies may look to downgrade the credit rating in Germany, Europe's largest economy.

Stocks fell sharply on the unsubstantiated rumors, with the major indexes snapping a three-day winning streak.

Traders said the market is largely looking ahead to Friday, when Bernanke will speak at the Kansas City Fed's annual retreat in Jackson Hole, Wyo.

At last year's meeting, Bernanke prepared the market for QE2 -- a bond-buying program that pumped billions of dollars into longer-term Treasuries earlier this year.

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But many economists doubt that the central bank will signal any new stimulus measures Friday, given the trillions of dollars in assets on its balance sheet and the fact that interest rates are already at historic lows.

"The general feeling in the market is that, regardless of what the Fed says or does, regardless of how much money Warren Buffett commits to BofA, the U.S. economy is on a track more towards a recession than a recovery," said Kevin Giddis, managing director of fixed-income at Morgan Keegan.

Buffett, the billionaire financier behind Berkshire Hathaway, announced a surprise $5 billion investment in Bank of America (BAC, Fortune 500) Thursday morning, sending shares of the struggling Dow component higher.

That helped lift shares of other big financial institutions, even as the broader market declined.

In economic news, a key reading on unemployment claims rose unexpectedly last week, reflecting the recent dispute between Verizon (VZ, Fortune 500) and its union employees.

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Meanwhile, the government sold $29 billion of 7-year debt on Thursday. The auction drew solid demand despite a meager yield of 1.58%.

Investors submitted bids totaling nearly $80 billion for the $29 billion worth of securities up for sale.

"The fact that we are seeing decent bidding at record low yield levels is a sign of strength in demand," analysts at Nomura Securities wrote in a research report.

The government also sold $35 billion of 5-year notes and $35 billion of 2-year notes this week. In both cases, investors took down the auctions despite record low yields.

On Thursday, the yield on the benchmark 10-year bond fell to 2.23%, down from 2.26% late Wednesday. Bond prices and yields move in opposite directions.

The yield on the 2-year note sank to 0.14% from 0.25%. The 30-year yield eased to 3.59% from 3.61%.