Looks like @VipulSparsh-MSFT jumped to conclusion after seeing "Azure Active Directory (AAD) managed accounts". AAD managed accounts or service account are different then user/Device account. I know it is possible as I am able to use yobukey with AAD user account on browser session. It is just a question of making it work on Windows hello which partially recognizes the device but it fails after typing the long hash.
But there are bunch of article about enabling yobikey on windows hello. I have not seen an article that says it is not supported. The article on the Yubikey is talking about managed identity which is for resource auth for consumption https://learn.microsoft.com/en-us/azure/active-directory/managed-identities-azure-resources/overview.
I am surprised this came as a response from MS as not supported by pointing to Yubikey article that is talking about completely different subject.
Unsupported scenarios
The following scenarios aren't supported:
Windows Server Active Directory Domain Services (AD DS)-joined (on-premises only devices) deployment.
Remote Desktop Protocol (RDP), virtual desktop infrastructure (VDI), and Citrix scenarios by using a security key.
S/MIME by using a security key.
Run as by using a security key.
Log in to a server by using a security key.