Updates to afternoon New York trading

By Chuck Mikolajczak

NEW YORK, May 6 (Reuters) - U.S. Treasury yields dropped on Wednesday as oil prices plunged on reports that the United States and Iran were closing in on an agreement for a one-page memorandum to end the war in the Gulf region.

A source from mediator Pakistan and another source briefed on the mediation confirmed information initially reported by the U.S. media outlet Axios.

Iran said it was reviewing a new U.S. proposal and an Iranian foreign ministry spokesperson, cited by Iran's ISNA news agency, said Tehran would convey its response soon via Pakistan.

U.S. crude CLc1 tumbled 7.48% to $94.62 a barrel and Brent LCOc1 nosedived to $100.88 per barrel, down 8.18%, down 6.48% on the day after the reports.

"The idea here is that we're seeing some movement towards a resolution in the Middle East obviously gets everybody excited," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

"We had the initial wave of bombings, it's certainly slowed down. We're in the ceasefire zone now, we're not looking for any sort of excuse to ramp it back up. And it's in the best interest of both parties and the rest of the world, just to kind of let this settle down."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 6.2 basis points to 4.354% after dropping to 4.334%, its lowest since April 27.

Urano also said the exceptionally strong U.S. corporate earnings season, powered in large part by AI spending, was supporting growth and keeping expectations for rate cuts from the Federal Reserve at bay, which helped to curb the decline in yields.

Since the U.S.-Israeli war with Iran began at the end of February, yields have steadily climbed as worries about higher prices have dented market expectations for rate cuts from the Federal Reserve this year.

The yield on the 30-year bond US30YT=TWEB declined 4 basis points to 4.942%. The 30-year had hit 5.036% on Monday, its highest since July 17.

QUARTERLY REFUNDING SET AT $125 BILLION

The U.S. Treasury Department announced on Wednesday total quarterly refunding of $125 billion from May to July, aimed at raising new cash of $41.7 billion from private investors, and would keep its coupon and floating rate note auction sizes steady for at least the "next several quarters."

"This outcome avoided signaling coupon increases as early as this year, which some market participants had expected," said Guneet Dhingra, head of U.S. Rates Strategy at BNP Paribas in New York, in a note, and said the firm's baseline is for coupon increases to begin in August 2027, focused in the 2-year to 7-year sector.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 48 basis points.

St. Louis Fed President Alberto Musalem said the risks to monetary policy have shifted towards higher inflation, possibly requiring interest rates to stay on hold for some time amid a seemingly stable job market.

Markets have virtually priced out any chance for a rate cut this year from the Fed, according to LSEG data.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, slumped 6.8 basis points to 3.87% and was on track for its biggest daily decline since April 17.

The latest round of labor market data for the week showed U.S. private payrolls increased more than expected in April, the ADP's national employment report said, rising by 109,000 last month after a downwardly revised 61,000 gain in March.

More labor data will come on Thursday in the form of weekly initial jobless claims, while the government's payrolls report is due on Friday.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.598% after closing at 2.763% on Wednesday. The breakeven rate had closed at 2.828% on Tuesday, its highest since August 2022.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.431%, indicating the market sees inflation averaging about 2.4% a year for the next decade.