By Matt Tracy

WASHINGTON, May 22 (Reuters) - U.S. Treasury yields slipped on Friday as investors digested the latest developments in peace talks between the U.S. and Iran.

The yield on the benchmark 10-year Treasury note US10YT=RR was last down 3.4 basis points (bps) in morning trading at 4.552%. A selloff early in the week led yields to hit months- or years-long highs, with the 10-year yield on Tuesday reaching its highest level since January 2025.

The 30-year Treasury bond's yield US30YT=RR, which is seen as a barometer of geopolitical and fiscal risk, was last down 3.6 bps at 5.075%. It briefly touched its highest level since July 2007 on Tuesday at 5.197%.

Yields retraced their gains on Thursday after reports that Iran was reviewing a final proposal to end a roughly three-month conflict that has driven up energy prices. Brent crude oil prices have also declined since Thursday and were last trading between $104 and $105 per barrel.

Elevated energy prices have stoked inflation concerns among investors and increased the odds that the Federal Reserve maintains a hawkish approach to monetary policy.

"Inflation has been running above the Fed’s target now for five or six years, so even away from the war it’s been a more challenged environment for Treasury yields," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.

"The market thinks the Fed’s next move is to hike rates," McIntyre said later. "If they do, that’s not a very friendly environment for risk assets."

The two-year Treasury note yield US2YT=RR, which typically moves in step with interest rate expectations for the Federal Reserve, was last down roughly one basis point at 4.078%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was last at 46.6 bps.

Investors are now pricing in a roughly 53.4% chance the Fed could raise rates in December, and a 94.2% chance it maintains current rates at its next meeting in June, according to the CME FedWatch tool.