Basis Point

The basics

A basis point is a small unit used to measure changes in percentages, most often interest rates, yields, or fees. One basis point equals one hundredth of a percent, or 0.01%. Written as a decimal that is 0.0001, so 100 basis points make up 1%.

Traders and analysts use basis points instead of percentages when the differences being discussed are small and precision matters. Saying "rates rose 25 basis points" is clearer than saying "rates rose 0.25%," because with plain percentages it is easy to misread or mistype a decimal point, especially when comparing two percentages to each other, like a move from 4.50% to 4.75%. That move is a quarter of one percentage point, which traders call 25 basis points.

The nuance that trips people up is the difference between a percentage point and a percentage change. If a rate moves from 2.00% to 2.02%, that is a move of 2 basis points in absolute terms, but in relative terms it is a 1% increase (2.02 is 1% higher than 2.00). Basis points almost always refer to the absolute, point-to-point move, not the relative percentage change, so "25 basis points" means the rate itself moved by 0.25 of a percentage point, regardless of what the starting rate was.

Basis points show up constantly in bond yields, central bank rate decisions, credit spreads, and the fees charged by funds or brokers. A management fee quoted as "50 bps" is 0.50% per year.

Why it matters on the desk

Day traders who watch interest-rate-sensitive instruments (bonds, currency pairs, rate-sensitive stocks) rely on basis points to size up how big a Fed or central bank move actually is, since a 25 bp surprise versus a 50 bp surprise can move markets very differently.

An example

If the 10-year Treasury yield goes from 4.20% to 4.45%, that is a 25 basis point increase. A trader watching bond futures would describe this as "yields up 25 bps," and would know that a jump of 50 bps or more on the same news is generally considered a much larger, more market-moving change.

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