Recasts headline, updates throughout

By Matt Tracy

WASHINGTON, May 22 (Reuters) - Yields on shorter-dated U.S. Treasury yields shot up on Friday as investors digested data pointing to all-time low U.S. consumer sentiment in May.

The two-year Treasury note yield US2YT=RR, which typically moves in step with interest rate expectations for the Federal Reserve, was last up 4.8 basis points at 4.127%.

Five-year Treasury yields were up 2.5 bps at 4.268%, while the yield on the benchmark 10-year Treasury note US10YT=RR was last up 0.4 basis points (bps) at 4.573%.

They rose following the University of Michigan's consumer survey that showed U.S. consumer sentiment plunged to an all-time low in May, as gasoline prices have soared due to the war with Iran.

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 44.9 bps.

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. Yields retraced their gains when Iran said it was reviewing the latest proposed peace deal with the U.S., in a conflict that has lasted roughly three months and driven up energy prices.

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

The 30-year Treasury bond's yield US30YT=RR, which is seen as a barometer of geopolitical and fiscal risk, briefly touched its highest level since July 2007 on Tuesday, but was last down 1.4 bps at 5.08%.

"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 swearing-in ceremony for incoming Fed Chair Kevin Warsh is slated for Friday. His comments will be closely followed by market participants, as uncertainty has swirled around the Fed's rates path under his leadership.

Investors are now pricing in a 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.

"I don’t think Warsh is going to try to alter the longstanding independence at the Fed," said Tim Sauermelch, senior portfolio manager for fixed income at SEI Investments.

"We expect continuity, we expect independence, we don’t expect any overt political pressure to impact anything."