(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%.