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US long-term yields stay flat, above those in Europe

The Federal Reserve's expected interest rate hike this week could further flatten the yield curve, given that 10-year Treasury yields have largely stayed unchanged this year.

The yields for 10-year Treasurys, though, remain significantly above those in most of Europe's largest economies, which saw yields for their 10-year sovereign bonds drop slightly in recent weeks.

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The U.S. central bank's Federal Open Market Committee is set to raise the federal funds rate for a third time this year. The rate is expected to go up by 25 basis points to a target range of 1.25% to 1.5% as Fed officials continue to see growth in the U.S. economy. Last month, for instance, the U.S. unemployment rate stayed at 4.1%, and nonfarm payroll employment rose by 228,000, according to the Department of Labor.

A rate hike is likely to push up yields for two-year Treasurys, which as of Dec. 8 were at 1.8%. Those have been steadily rising since the Fed began its campaign to gradually raise the federal funds rate after years of keeping it near zero.

Observers have raised concerns about the possibility that the yield curve may invert, when yields for two-year Treasurys would surpass those of 10-year ones. The spread between the two is now at roughly 0.6%, the lowest it has been since 2007, and an inversion has typically signaled an upcoming recession.

Yields for 10-year Treasurys have picked up from record lows last year, but they still remain far below historical norms.

Still, 10-year yields in the U.S. remain above those in several of the world's largest economies. The only notable exceptions are Brazil, Mexico, India, China and Russia. The U.S. measure is roughly on par with that of Australia and South Korea.

Ten-year sovereign bond yields dipped slightly in France, Germany, Italy, Spain and the U.K. compared to the end of October, while those in the U.S. remained unchanged.

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The drop in several European countries comes as the European Central Bank announced it would begun to cut how many bonds it purchases, the first step in the ECB's end of its quantitative easing program, which for now is being extended until September 2018.

The tightening in U.S. monetary policy is further underway, with the Fed looking to cut its $4.5 trillion balance sheet by letting some of its assets mature. It began the reductions in October, though it capped the amount of assets that were rolled off to $10 billion each month. Next month, that cap will go up to $20 billion and will rise until it reaches a $50 billion monthly limit in October 2018.

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