Toll Brothers bonds rally, bucking a broader trend as mortgage rates ease

Toll Brothers Inc. bonds were rallying on Wednesday, a day after the luxury home builder reported a drop in home-sales revenue but said it was encouraged by falling mortgage rates.

Shares of Toll Brothers TOL, +1.94% rose 3.3% to $90.07, on pace for a record close, based on Dow Jones Market Data going back to 1986.

The builder’s bonds were getting a boost too, even though the sector has seen selling pressure in the past two weeks, according to BondCliQ Media Services.

Beyond Toll Brothers, shares of the SPDR S&P Homebuilders exchange-traded fund XHB were up 2% Wednesday, also heading for a record close, according to Dow Jones Market Data.

Furthermore, nine of out 35 stocks in the fund were headed for record highs, including those of Lennar Corp., LEN, +2.63% D.R. Horton Inc. DHI, +2.20% and Lennox International Inc. LII, +1.25%.

The rally comes as optimism has been building around falling mortgage rates, which could help thaw home-sales activity in the months ahead. The 30-year fixed mortgage rate was pegged at 7.08% on Wednesday, down from a peak of 7.91% in October, according to Mortgage News Daily.

Mortgage rates are driven in large part by long-term Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y, which have dramatically eased since October. Longer-term rates have receded on a view that the Federal Reserve may be finished raising interest rates in this cycle and poised to cut next year as inflation pressures ease.

However, most U.S. homeowners had already locked in historically low mortgage rates of less than 4% during the pandemic. That couples with a critical supply shortage of homes to buy, which is likely keeping a lid on affordability and sales activity.

Bond giant Pimco this week pointed to resilient home prices despite home sales that fell to 3.79 million in October — down from a 6.5 million pandemic peak — as part of its rationale for remaining bullish on mortgage bonds.

A Pimco team led by portfolio manager Daniel Hyman also said they expect home sales to further decline to about 3.5 million to 3.75 million, due to the “lock-in effect” of homeowners not wanting to give up low mortgage rates.

Toll Brothers on Tuesday reported a profit and revenue slump in the fourth quarter, including an 18% drop in home-sales revenue to $2.95 billion compared with the year-ago quarter. It also delivered 2,755 homes in the quarter, down 27% year over year.

The company will expand its offerings to include lower price points, albeit still in the luxury segment, CEO Douglas Yearley Jr. said during a fourth-quarter earnings call Tuesday.

“As I’ve talked about, with 75 million millennials out there, we were not going to wait for them to hit their 40s and buy their move-up home, which is what Toll Brothers has always been about,” he said.

Toll Brothers didn’t immediately respond to a request from MarketWatch for comment.

Stocks were mixed Wednesday, pausing after a powerful rally in November that has the Dow Jones Industrial Average DJIA and S&P 500 SPX nearing a return to record levels.