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Basis Point (BPS)

 

What are Basis Points (BPS)

A basis point (bps), sometimes written as 1 bps, is 1/100th of a percentage point, or 0.01%, or 0.0001. It can also be labeled a “pip” or a “bip” or “bp.”

A basis point (bps), sometimes written as 1 bps, is 1/100th of a percentage point, or 0.01%, or 0.0001. It can also be labeled a “pip” or a “bip” or “bp.”

The term is commonly used in the fixed income community when discussing yields and interest rates. It is also used among income stock investors who are focused on the yield of an investment as a function of the dividend.

As well, central bank policy announcements often include interest rate changes that are expressed as basis points, e.g., a 25 basis point increase of the Federal Funds rate is an increase of 0.25% or a quarter of a percentage point. Basis points are often used to quantify the difference between the yields of two fixed income instruments because the metric can be cleaner than using percentage points, e.g., 102 bps = 1.02%.

Yield Curves and Basis Points

A series of fixed income maturities from a common source, e.g., a central bank, is called a yield curve. Basis point spreads between these maturities are expressed as the yield of the shorter maturity subtracted from the yield of the longer maturity. A wide or steep spread shows a large difference between the yields, a narrow or flat spread shows a small difference between the yields.

An inverted spread includes a higher yield on the shorter maturity than the longer maturity, which suggests that, for some reason, the shorter maturity is unusually risky at the time. (Yields of longer maturities are normally higher because more things can go wrong over longer periods.)

For example, if the yield of the 2-year Treasury note is currently 2.70% or 270 bps, and the yield of the 10-year Treasury note is 2.88% or 288 bps, then the 2s/10s Treasury spread is 18 bps. If in the previous week, the difference between the yields was 25 bps, then the 2s/10s spread has flattened by 7 bps. If the yield of the 2-year note rose to 2.95% but the yield of the 10-year note remained unchanged, the spread would be inverted at a value of -7 bps.

Basis Points And Consumer Rates

Basis points are also commonly used when comparing consumer rates like the prime rate, credit card rates, and mortgage rates. A change in these rates is often expressed as a change of basis points because it is commonly less than a percentage point, e.g., 0.5% = 50 bps, or it includes a fraction of a percentage point, e.g., 1 ⅜% = 137.5 bps.

Basis points are also commonly used when comparing consumer rates like the prime rate, credit card rates, and mortgage rates. A change in these rates is often expressed as a change of basis points because it is commonly less than a percentage point, e.g., 0.5% = 50 bps, or it includes a fraction of a percentage point, e.g., 1 ⅜% = 137.5 bps.

Also, these rates are often determined as a function of risk compared to a base rate like the Federal Funds Rate or the 10-year Treasury note yield. Since 1994, the prime rate has typically been the Federal Funds rate plus 3%, or 300 bps. The difference between a 10-year mortgage rate and the 10-year Treasury note yield is commonly expressed in basis points for clarity when comparing one instrument to another.

Finding Basis Point Information on Investing.com

The United States Bonds Yield Curve page at Investing.com includes a chart and table with current yields for the 1-month bill through the 30-year Treasury bond. The table includes a row for each instrument with a column of the day’s changes where 0.01 = 1 basis point.

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