TREASURIES-Yields slide on Iran deal progress, economic data

(Updates with latest market activity throughout, new comments)

By Matt Tracy

May 21 (Reuters) - U.S. Treasury yields fell on Thursday following reports that the United States and Iran have neared a final draft of a peace deal.

The yield on the benchmark 10-year Treasury note was last down 0.8 basis points on the day at 4.575%. 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 two bps at 5.096%. It briefly touched 5.197% on Tuesday, its highest since July 2007 before the global financial crisis. An earlier selloff in U.S. and global bond markets this and last week led yields to hit months- or years-long highs. But yields fell on Wednesday after President Donald Trump's comments that a final draft of a deal to end the Iran war was in its final stages.

"The sticker shock to the market and to the media yields have been breaking out higher for a while now and the pendulum of sentiment has been swinging away from the rate cut theme that Trump is touting right now," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

Yields rose again in early Thursday trading alongside oil prices, as Brent crude oil prices bounced back from their Wednesday decline following Trump's comments. But they reversed course after Thursday showed U.S. weekly jobless claims fell in the week ended May 16. Yields fell further Thursday after Iran state media said its government was reviewing the latest U.S. proposal for a peace deal.

The two-year Treasury note yield, which typically moves in step with interest rate expectations for the Federal Reserve, was last up 2.3 bps at 4.08%. 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 49.3 bps.

Investors are now pricing in a roughly 60% chance the Fed could raise rates in December, and a 98.9% chance it maintains current rates at its next meeting in June, according to the CME FedWatch tool.

"We're thinking that rates remain elevated for the remainder of the year and that the curve stays around the same level for the rest of the year," said Molly Brooks, U.S. rates strategist at TD Securities.

The Treasury Department on Thursday sold $19 billion in 10-year Treasury Inflation-Protected Securities (TIPS), which had a bid-to-cover ratio of 2.53, which was higher than the previous auction's 2.38.

Indirect bidders, which can include governments, fund managers and insurance companies, took down roughly 61% of the sale, while direct bidders made up 27.5%. The 10-year TIPS' yield was last up 1.1 bps at 2.144%. (Reporting by Matt Tracy; Editing by Nick Zieminski and Will Dunham)