A "sold" sign is seen outside of a recently purchased home in Washington, U.S., July 7, 2022. REUTERS/Sarah Silbiger/File Photo

(Reuters) -The interest rate on the most popular U.S. home loan dropped by the most in six months last week after a weak employment report drove benchmark Treasury bond yields down in anticipation of a Federal Reserve rate cut at its meeting next week.

The Mortgage Bankers Association on Wednesday said the contract rate on a 30-year, fixed-rate mortgage dropped 15 basis points in the week ended September 5 to 6.49%, the lowest since last October.

With the latest decline, the rate has dropped by 60 basis points since mid-January and has fueled a boost in application volumes both for loans to purchase a home and to refinance an existing loan, the data showed.

The MBA's weekly applications index rose 9.2% last week to 297.7, the highest in more than three years. The increase was led by a 12.2% increase in the index tracking applications to refinance a mortgage to its highest in nearly a year. Refinancing applications accounted for nearly half of all applications last week, MBA said.

The index tracking loans for property purchases rose 6.6% to its highest in about two months.

The housing market has been in a protracted slump due to a combination of high borrowing costs, elevated property prices and limited supply of homes on the market, but recent data suggest the worst may have passed for the sector. The supply of existing homes for sale has been steadily inching higher, annual price increases have started leveling off, and interest rates now appear ready to ease further as the Fed seems ready to shift gears to cut rates as early as next week.

The central bank has left its benchmark rate steady since last December at 4.25%-to-4.50% on concern that President Donald Trump's aggressive tariffs would fuel an upswing in inflation.

But while inflation has edged higher, officials in recent weeks have shown more concern about a weakening job market.

Back-to-back monthly job reports have fallen short of economists' forecasts and were accompanied by large downward revisions to prior estimates of job growth. Moreover, data on Tuesday showed that nearly a million fewer jobs were created in the 12 months through March than earlier reported.

Yields on 10-year Treasury notes, which banks use as a benchmark for setting mortgage rates, have fallen sharply in response to the softening job market data, and home loan rates have followed suit.

Trump has demanded rate cuts since he returned to the White House in January and has kept up relentless pressure on the Fed, regularly belittling central bank Chair Jerome Powell and more recently moving to oust Fed Governor Lisa Cook.

Rate futures markets are positioned by and large for a reduction of 25 basis points at the conclusion of the Fed's September 16-17, with futures prices reflecting a roughly 7% probability of a 50-basis point cut.

(Reporting by Dan Burns; Editing by Sam Holmes)