Schwab Capitalizes on Higher Yields with a $2.5 Billion Bond Issue

Charles Schwab Corp. has announced plans to raise up to $2.5 billion through a debt offering, capitalizing on a recent surge in investor interest towards higher yields in the corporate bond market​​. The Texas-based company will raise the debt in two parts, via notes due in 2029 and 2034, with proceeds earmarked for general corporate needs and to fuel business growth​.

The bond offering comes after a profitable first quarter for Schwab, exceeding market expectations, thanks to a significant boost in interest income. Schwab CEO, Walter Bettinger, has expressed confidence in the company’s robust liquidity position​​. The debt offering also follows a recent announcement by Pfizer Inc. of plans to raise $30 billion in debt, signalling renewed deal-making vigour on Wall Street​​.

The offering’s notes due in 2029 would yield 205 basis points more than the benchmark, risk-free U.S. 5-year Treasury, while the yield on 2034 notes would be 227 bps above the U.S. 10-year Treasury yield​​. On the day of the announcement, Schwab’s stock fell by 1%​​.

Investment-grade rated corporate bonds have become increasingly appealing due to growing expectations that the Federal Reserve will maintain higher rates for an extended period​​. For example, the week of May 17th saw the second-highest volume of new investment-grade corporate bond issuance for the year, reaching $57 billion, as companies sought to finalize deals ahead of potential interest rate hikes and a looming debt-ceiling deadline​​.

The joint book-running managers for Schwab’s offering include BofA Securities, Citigroup, Credit Suisse Securities, Goldman Sachs, J.P. Morgan Securities, and Wells Fargo Securities​​. In trading on the day of the announcement, the bond spread tightened by three to five basis points from their new issue level, indicating a healthy regional-bank space​​.

The news of Schwab’s offering comes amid optimism surrounding a potential resolution to the U.S. debt ceiling debate. President Joe Biden and top U.S. congressional Republican Kevin McCarthy have both expressed their determination to reach an agreement, fueling investor confidence​​. The current trend of pouring money into corporate bonds is expected to continue, according to market observers, as investors seek higher yields relative to other asset classes​​.

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