Basis Point: The Unit Rates and Yields Move In

“Yields rose 15%.” Read literally, a 4.25% yield that rose 15% would now sit near 4.89%. What the headline writer usually means is that the yield rose from 4.25% to 4.40%, which is fifteen basis points, and that’s a much smaller move. Quoting in basis points removes the doubt.

The conversion

1 basis point = 0.01 percentage point. 100 basis points = 1 percentage point.

To go from percentage points to basis points, multiply by 100. To go back, divide by 100. A 25 basis point rate change is 0.25 percentage points. A 0.75 point move is 75 basis points. That’s all there is to the arithmetic, and the rest of the work is keeping it apart from percent change.

Percentage points and percent are different measures

The second example shows why the distinction matters. A rate that goes from 2.00% to 2.50% is up 50 basis points, and it’s also up 25% in relative terms. Both statements are accurate. They answer different questions. Basis points tell you the absolute change in the rate, and percent tells you the change relative to where it started. The same 50 basis point rise from 5.00% would be only a 10% relative increase (0.50 / 5.00), which is why a move of the same size can feel dramatic at low rates and routine at high ones, and why quoting the change in basis points keeps two moves of equal size looking equal no matter where the rate began.

Fed decisions, bond moves and credit spreads are almost always quoted in basis points. Stock moves are quoted in percent. Readers who carry the stock habit over to rates end up describing a quarter-point Fed move as if it were a quarter-percent change in something, and that small slip makes it hard to compare one rate move with another.

Where you’ll see it

On a Treasury quote screen, the change column for a yield is often shown in basis points, sometimes with a “bp” label, sometimes as a decimal like +0.15. After a Federal Reserve meeting, a change to the target range is described in basis points; a quarter-point move is 25. Commentary on the minutes, covered in why markets react to Fed minutes, will talk about how many basis points of cuts or hikes the futures market expects.

Spreads are quoted the same way. If a hypothetical corporate bond yields 5.60% and a Treasury of the same maturity yields 4.40%, the spread is 1.20 percentage points, or 120 basis points, and when that spread widens to 150 basis points the market is demanding 30 more basis points of yield for the extra credit risk.

Fees use the unit too. A fund with an expense ratio of 0.05% charges 5 basis points a year.

On a larger or longer-held balance the same arithmetic scales directly: ten times the balance, ten times the fee.

Why the unit matters for your holdings

Yield changes feed into valuations. When Treasury yields rise, the income from a dividend stock competes with a higher risk-free rate, which is part of how rising interest rates affect dividend stocks. Big moves in yields tend to follow a surprise, often in inflation data, and the argument in why core inflation deserves more attention is partly about which reading shifts rate expectations.

What people get wrong

• Calling a 50 basis point rise a 50% rise.
• Reading “up 0.5%” on a yield as percent change when it means half a point.
• Treating fee differences of a few basis points as nothing. Over years and large balances they add up.
• Confusing a change in yield with a change in price. A bond’s price falls when its yield rises, and a basis point of yield is a different quantity from a basis point of price.

Related terms

A percentage point is 100 basis points. A spread is the gap between two yields, usually quoted in basis points, such as the gap between a corporate bond and a Treasury of the same maturity. An expense ratio is a fund’s annual fee, often compared in basis points. For more on the economic releases that move yields, see the economy topic.