Did you follow step 1 in the instructions?
https://www.yubico.com/applications/com ... ows-login/1. Configure your YubiKey for challenge-response using HMAC-SHA1 with variable input for slot 2. For instructions on how to do this using the YubiKey Personalization Tool, review the instructions in the Yubico Windows Login Guide (available in PDF format from our Documentation page). When configuring your YubiKey, be sure that “Require user input (button press)” is not selected.
You have to program the Challenge-Response credential using the Personalization Tool BEFORE enabling the YubiKey requirement for Windows login. Also, make sure you are using a Local account and not a Cloud account (where you log in with an e-mail).