Toll Brothers Bonds Rally on Mortgage Rate Drop

Luxury home builder, Toll Brothers Inc., experienced a surge in bond prices following the release of their latest financial report. While the report showcased a decline in home-sales revenue, the company expressed optimism due to the decrease in mortgage rates.

In line with this positive development, shares of Toll Brothers saw a significant increase, with prices rising by 3.3% to $90.07. This upward trend suggests a potential record close for the company, based on Dow Jones Market Data dating back to 1986.

Interestingly, Toll Brothers' bonds also received a boost, defying the recent selling pressure experienced by the sector. BondCliQ Media Services reported a surge in bond prices, indicating growing investor confidence.

The positive sentiment extended beyond Toll Brothers, as shares of the SPDR S&P Homebuilders exchange-traded fund (XHB) also saw a 2% increase on Wednesday. This surge suggests a potential record close for the fund, according to Dow Jones Market Data.

Additionally, within the fund, nine out of 35 stocks were heading towards their all-time highs. Notable stocks in this category included Lennar Corp., D.R. Horton Inc., and Lennox International Inc.

This rally coincides with the increasing optimism surrounding falling mortgage rates, which could potentially stimulate home-sales activity in the coming months. On Wednesday, the 30-year fixed mortgage rate stood at 7.08%, a significant drop from its peak of 7.91% in October (according to Mortgage News Daily).

The decrease in mortgage rates is primarily influenced by long-term Treasury yields, which have seen a substantial decline since October. Experts believe that this decline reflects speculation that the Federal Reserve may halt interest rate hikes in the current cycle and possibly even implement cuts next year as inflationary pressures ease.

However, it should be noted that most homeowners in the U.S. have already secured historically low mortgage rates of below 4% during the pandemic. Additionally, the critical shortage of available homes for purchase has contributed to limited affordability and sales activity in the market.

Resilient Home Prices Amidst Declining Sales: Pimco Remains Bullish on Mortgage Bonds

Bond giant Pimco has recently highlighted the resilience of home prices, even in the face of decreasing home sales. Despite falling to 3.79 million in October from a peak of 6.5 million during the pandemic, Pimco maintains a bullish outlook on mortgage bonds.

Led by portfolio manager Daniel Hyman, the Pimco team explains that they anticipate a further decline in home sales to approximately 3.5 million to 3.75 million. This is attributed to the "lock-in effect" as homeowners are hesitant to give up their low mortgage rates.

On Tuesday, Toll Brothers reported a decline in profit and revenue for the fourth quarter, with home-sales revenue dropping by 18% to $2.95 billion compared to the same period last year. The number of homes delivered in the quarter also decreased by 27% year over year, totaling 2,755 homes.

Related: Toll Brothers' Optimism Persists Despite Fewer Home Sales and Lower Mortgage Rates

During a fourth-quarter earnings call, CEO Douglas Yearley Jr. expressed that the company will broaden its offerings to include lower price points, while still maintaining a focus on luxury housing options.

"With 75 million millennials in the market, we are not willing to wait for them to reach their 40s to purchase move-up homes, which has traditionally been Toll Brothers' niche," Yearley emphasized.

On Wednesday, stock performance was mixed as markets took a pause following November's robust rally, which propelled the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) close to record levels.