(Updates to afternoon US trading)

* Plunge in oil prices boosts equities and risk appetite

* Fed rate-cut expectations revived by lower oil prices

* Ten-year notes auction seen as mediocre

By Chuck Mikolajczak

NEW YORK, April 8 (Reuters) - U.S. Treasury yields fell

on Wednesday after a two-week ceasefire between the U.S. and

Iran sent oil prices plummeting and resurrected the possibility

of interest rate cuts by the Federal Reserve this year.

U.S. President Donald Trump on Tuesday agreed to a ceasefire

with Iran that was brokered by Pakistan, roughly two hours

before his deadline for the Iranians to reopen the critical

Strait of Hormuz or face attacks on the country's civilian

infrastructure.

Trump is dispatching his Iran negotiating team, led by Vice

President JD Vance, to Pakistan for talks, the White House told

reporters, adding that the first round of negotiations would

take place on Saturday.

However, Iran's Parliament speaker Mohammad Baqer ‌Qalibaf said

three key clauses of a 10-point proposal from Tehran were

violated before negotiations even began.

The reprieve could lead to the reactivation of the strategic

waterway that typically carries about 20% of the world's oil and

gas, sending oil prices below $100 per barrel and sparking a

sharp rally in equities.

U.S. crude tumbled 14.3% to $96.82 a barrel and Brent

plunged to $97.04 per barrel, down 11.2%.

"We're still in a period of volatility, perhaps we remain in

a period of heightened volatility, but it all comes down to that

duration of the closure of the Strait of Hormuz and how long are

energy prices disrupted," said Bill Merz, head of capital

markets research at U.S. Bank Asset Management Group.

"If transportation through the Strait of Hormuz normalizes

in relatively short order, and that catalyzes the normalization

in energy prices in relatively short order, a cut in that

scenario later in the year is certainly a possibility."

TREASURY YIELDS POST BIGGEST DROP SINCE MARCH

The yield on the benchmark U.S. 10-year Treasury note

fell 5.4 basis points to 4.289%, while the yield

on the 30-year bond shed 3.6 basis points to

4.885%. Both were on track for their biggest daily drops since

March 30.

After a solid $58 billion auction of 3-year notes on

Tuesday, a $39 billion auction in 10-year notes was seen as

decent by analysts, with demand for the debt at 2.43 times the

notes on sale coming in slightly below average.

The week's auctions will be capped off on Thursday with $22

billion of 30-year bonds.

The tumble in crude prices bolstered expectations that the

Federal Reserve may now have some cushion to cut interest rates

this year. Expectations for a cut of at least 25 basis points at

the U.S. central bank's December 8-9 meeting stand at 25.3%,

according to CME's FedWatch Tool, up from 14.1% in the prior

session.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations for the

Fed, declined 4.5 basis points to 3.788%.

MARKETS REASSESS FED POLICY OUTLOOK

Several Fed officials said on Tuesday the sharp rise in oil

prices due to the war posed a risk to inflation, even as it

slows the economy and the labor market. On Wednesday, San

Francisco Fed President Mary Daly said the U.S. economy is

fundamentally in a "good place" despite the sharply higher oil

prices.

Minutes from the Fed's March 17-18 meeting showed a growing

group of policymakers felt that interest rate hikes might be

needed to counter inflation that continued to exceed the central

bank's 2% target.

Markets had been pricing in roughly two U.S. rate cuts

before the war began on February 28.

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 at a positive 49.9 basis points.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.598% after closing at 2.644% on Tuesday.

The 10-year TIPS breakeven rate was last at

2.342%, indicating the market sees inflation averaging about

2.3% a year for the next decade.