TREASURIES-Yields fall after Trump signals Iran deal talk progress

* Treasury yields retraced Tuesday gains after Trump says Iran deal near

* Treasuries have sold off as Iran war, high energy levels persist

* 20-year bond auction meets with somewhat soft demand (Recasts headline, updates with latest market activity, comments throughout)

By Matt Tracy

May 20 (Reuters) - Yields on U.S. Treasuries on Wednesday retraced their previous day's gains, after President Donald Trump said deal talks with Iran were in their final stage.

The yield on the benchmark 10-year Treasury note was last down roughly 10 basis points on the day at 4.567%. It reached its highest level since January 2025 on Tuesday, surging to 4.687%.

The 30-year Treasury bond's yield, which is seen as a barometer of geopolitical and fiscal risk, was last down roughly 7 bps at 5.113%. It briefly touched 5.197% on Tuesday, its highest since July 2007 before the global financial crisis.

But a relatively strong 20-year Japanese bond auction prompted yields to retrace their gains. Yields solidified their retreat later on Wednesday following President Donald Trump's comments that deal talks with Iran were in their final stages.

"Markets are solely focused on Iran and geopolitical catalysts," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "There are too many domestic catalysts until the afternoon."

A selloff in U.S. and global bond markets took hold earlier this and last week as peace talks stalled between the U.S. and Iran and energy prices have remained elevated since the war started in late February. Brent crude oil prices were just over $108 per barrel on Wednesday after hitting $111 per barrel on Monday.

"We're at a point with yields and the bond market selloff where the equity market is starting to take notice," said Tim Saurmelch, senior portfolio manager for fixed income at SEI Investments.

"When you get to the point where yield levels become more elevated, the cost of geopolitical uncertainty tends to be a little bit less abstract," Saurmelch said, noting he expects the Fed to hold rates steady in the near term.

Investors are now pricing in a 41.4% chance the Fed could raise rates in December, and an 89.6% chance it maintains current rates at its next meeting in June, according to the CME FedWatch tool.

"Yesterday's selloff was based on inflation expectations," said Eric Jussaume, director of fixed income at Cambridge Trust.

"I think if you just look at what's going on the Fed futures market you're seeing a big shift from earlier this year," Jussaume later noted.

The 2-year Treasury note yield, which typically moves in step with interest rate expectations for the Federal Reserve, was last down roughly 8 bps at 4.04%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was last at 52.52 bps.

Minutes from the Fed's April Federal Open Market Committee meeting will be released later on Wednesday.

The Treasury Department sold $16 billion in 20-year bonds on Wednesday, which met with "a bit light" demand on a bid-to-cover ratio of 2.55, according to Vail Hartman, U.S. rates strategist at BMO Capital Markets.

"The last seven consecutive Treasury coupon auctions have tailed, so clearly there is some hesitation to bid aggressively especially as yields are so high," Hartman said.

Yields on 20-year bonds ticked lower following the auction and were last down 7.7 bps at 5.123%. (Reporting by Matt Tracy; Editing by Alex Richardson, Nick Zieminski and Aurora Ellis)