NEW YORK: 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. (Reporting by Chuck Mikolajczak; Editing by Will Dunham and Paul Simao)