(Updates to morning US trading)

* Oil prices plunge, boosting equities and risk appetite

* Drop in oil revives Fed rate-cut expectations

* CME Fedwatch shows increased odds

By Chuck Mikolajczak

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

tumbled on Wednesday after a two-week ceasefire between the

United States and Iran ignited a relief rally across asset

classes as plummeting oil prices revived 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 its civilian infrastructure.

The reprieve could lead to the reactivation of the strategic

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

gas, and sent oil prices below $100 per barrel and sparked a

sharp rally in equities.

U.S. crude fell 17.66% to $93.05 a barrel and Brent

fell to $92.00 per barrel, down 15.8%, with both on

track for their biggest daily percentage declines since April

2020.

"Markets are breathing a huge sigh of relief that Trump and

Iran have found an off-ramp for now, and to the extent that this

could be the path forward that reduces the odds of a protracted

$150 or $200 oil price," said Robert Tipp, chief investment

strategist and head of global bonds at PGIM Fixed Income in

Newark, New Jersey.

"Therefore, you see some drop back in yields as that

probability goes down, an improvement in risk appetite with

stocks up and credit product outperforming," Tipp said.

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

fell 7.9 basis points to 4.264% while the yield on

the 30-year bond declined 6.1 basis points to

4.86%. Both were on track for their biggest daily drop since

March 30.

The tumble in crude prices helped lift 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 December meeting stand at 34.8%, according to CME's FedWatch

Tool, up from the 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, slid 7.4 basis points to 3.759%.

Several Fed officials had said on Tuesday that the sharp rise in

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

it slows the economy and the labor market.

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 50.3 basis points.

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

on Tuesday, more supply will come to the market on Wednesday

with $39 billion in 10-year notes, while a $22 billion auction

of 30-year bonds is scheduled for Thursday.

Deutsche Bank said in a note that head of U.S. Treasury

trading Ray Johnson expects Wednesday's auction "to go well but

is less optimistic about duration after the auction given still

elevated uncertainty in the Middle East."

Fed officials scheduled to speak on Wednesday include Bank

of San Francisco President Mary Daly and Governor Christopher

Waller.

The minutes from the Fed's March meeting will also be released

later in the day, and could provide further details on the risks

policymakers and central bank staff see from the war.

March inflation data is scheduled to be released on Friday

in the form of the consumer price index, and will give an

indication of the impact on prices from the war.

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

Inflation-Protected Securities (TIPS) was last at

2.569% after closing at 2.644% on April 7.

The 10-year TIPS breakeven rate was last at

2.33%, indicating the market sees inflation averaging about 2.3%

a year for the next decade.