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I'd like to use this but it still doesn't work with my Yubikeys (blue U2F ones). I get an error message saying "this security key can't be used" with no indication of why. Same on multiple browsers with multiple keys.
Do you have PIN configured?

As I understand it, I think Microsoft asks for a credential with "User Verification", which requires a pin code, password or biometric recognition.

If the Yubikey is used a second factor (instead of the only factor as with passwordless), you can be more lax and ask for "User Presence", which only requires touching the key.

ref: https://w3c.github.io/webauthn/#test-of-user-presence