Eight Things That ZIRP Did for the Corporate Bond Market

The market remains deeply divided about whether the Federal Reserve on Thursday will embark on its first interest rate hike in almost a decade, but it's worth taking a moment to appreciate just what nearly seven years of near-zero interest rates (what's affectionately called ZIRP, for zero interest rate policy) accomplished for the U.S. corporate bond market. In two words: a lot.

1. For a start, it led to a huge boom in corporate credit. Low interest rates have encouraged companies to lock in lower borrowing costs by selling their bonds to eager, yield-hungry investors. The overall size of the U.S. corporate bond market has jumped from $5.4 trillion at the end of 2008 to almost $8 trillion currently—an astounding 47 percent increase. As Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, put it in a recent research note: "The U.S. corporate bond market benefited more than most asset classes from the environment over the past five to six years of extremely easy monetary policy conditions, as Zirp prompted an unprecedented reach for yield." The below chart, also from BofAML, shows investment-grade corporate bond issuance as a percentage of U.S. GDP. That figure would be a lot higher if it also included the junk debt sold by lower-rated companies with riskier balance sheets.