Freddie Mac reports that the 30-year mortgage rate has fallen to 6.74%, slightly lower than last week. Unfortunately, new and existing home sales did not meet expectations this week. Mortgage rates are still high, prompting calls for lower rates, including from Trump. These rates are affected by the 10-year yield, which might drop if the Federal Reserve lowers the Fed funds rate.

Mortgage Rate Fluctuations

Since November, the mortgage rate has varied between 6.68% and 7.04%. This small range is important in a housing market that needs lower rates to address ongoing challenges. The recent dip in the 30-year mortgage rate to 6.74% seems minor for a struggling housing market. Recent data backs this up, showing a 4.7% drop in new home sales for May and a 0.7% decline in existing home sales from the previous month. This indicates that affordability issues still hold back the market. For derivative traders, this signals a stable environment for the 10-year Treasury yield, which significantly impacts home loans. As long as mortgage rates stay within the narrow range seen since November, we expect the 10-year yield to remain stable as well. This suggests that selling volatility could be a smart move in the near term. In this context, using an iron condor strategy on 10-year Treasury futures (/ZN) might be beneficial. This strategy allows us to earn premium by betting that yields will stay within their recent range in the upcoming weeks. The MOVE Index, which measures bond market volatility, has dropped from over 150 to about 100 in 2023, indicating a period of lower volatility ahead.

Market Strategies and Predictions

While former President Trump’s calls for rate cuts are mainly political, our attention remains on the Federal Reserve’s timeline. The CME FedWatch Tool currently indicates that there is more than a 60% chance of a rate cut by the September meeting, meaning the market does not anticipate immediate changes. Any surprises in inflation data or Fed statements will be key to watch. Typically, the period leading up to a Fed policy shift can be quiet before volatility increases sharply, as seen in late 2021 when the central bank warned of aggressive tightening. Traders might position for a future breakout by using calendar spreads on Treasury options. Selling shorter-term contracts can help finance the purchase of longer-dated ones, allowing us to benefit from the current calm while preparing for potential movement later in the year. In addition to interest rates, we can consider options on homebuilder ETFs like ITB or XHB. The median price of existing homes has just hit a record high of $419,300, even as sales volume has decreased, putting pressure on the sector. Buying protective puts on these ETFs could be a great way to hedge against a potentially larger downturn if interest rates stay high longer than expected. Create your live VT Markets account and start trading now.

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