A Basis Point (bps) is a unit of measurement used to describe the percentage change in interest rates or other financial percentages. One basis point is equal to 1/100th of 1%, or 0.01%.
Basis Points are used for precision in financial calculations, especially when discussing changes in interest rates and fixed income instruments. They help to avoid confusion and provide a standard measurement for expressing percentages.
They are commonly used in the financial sector especially when discussing fixed income instruments, interest rates, and investment returns. They’re also used by central banks when adjusting interest rates, and in the consumer lending market to express changes in loan rates.
The conversion from percentage to basis points is straightforward: 1% equals 100 basis points. So, to convert a percentage to basis points, you multiply by 100. For example, 0.25% equals 25 basis points.
A yield curve is a graph that plots the yields of similar quality bonds against their maturities. The curve shows the relationship between the interest rate (or cost of borrowing) and the time to maturity of the debt.
An inversion of the yield curve occurs when short-term interest rates exceed long-term rates. This inversion often suggests that investors expect lower interest rates in the future, which is often the case during a looming economic downturn.
Basis Points are used to calculate the spread between different issues on the yield curve. For example, the difference in yield between a 2-year and a 10-year government bond might be expressed in basis points.
Consumers may encounter basis points when looking at loan rates. Changes in loan rates are often expressed in terms of basis points as they usually represent small changes.
If the Federal Reserve decides to raise interest rates by a quarter of a percentage point, this would be stated as an increase of 25 basis points.
The article mentions the US government bond yields page which offers a chart of yields for various countries. Additionally, financial news platforms, investment brokerages, and financial institutions often provide detailed analysis and data where basis points are discussed.