TREASURIES-Shorter-dated yields rise on all-time low consumer sentiment

(Updates through with latest market activity)

By Matt Tracy

WASHINGTON, May 22 (Reuters) - 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, which typically moves in step with interest rate expectations for the Federal Reserve, was last up 4.4 basis points at 4.123%.

Five-year Treasury yields were up 1.3 bps at 4.255%, while the yield on the benchmark 10-year Treasury note was last down 1.1 basis points (bps) at 4.557%. 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 Iran war.

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 43.5 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 United States in a war that began on February 28 and has 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, 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 3 bps at 5.064%.

"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."

Uncertainty has swirled around the Fed's rates path under incoming Fed Chair Kevin Warsh, appointed by President Donald Trump.

In brief comments after his Friday swearing-in ceremony, Warsh said: "To fulfill this mission, I will lead a reform-oriented Federal Reserve, learning from past successes and mistakes, both escaping static frameworks and models and ?upholding clear standards of integrity and performance."

Investors are now pricing in a 66.6% chance the Fed could raise rates in December, and a 96.5% 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."

(Reporting by Matt Tracy in Washington; Editing by Hugh Lawson, Will Dunham and Peter Graff)