What is a basis point?
One hundredth of a percentage point. A move from 4.50% to 4.55% is five basis points, written 5bp. Rates get quoted this way because 0.05% and 5% are a hundred times apart, and confusing the two is expensive.
Basis Points
A basis point (bp, pronounced "bip") is one hundredth of a percentage point: 1bp = 0.01%, and 100bp = 1.00%. In the rates market, yields, spreads, auction tails, rate hikes and fees are all quoted in bips.
A percentage of a percentage gets confusing fast, which is why the market does not quote rates that way. If a yield goes "up 1%" from 4.00%, does that mean 4.04% or 5.00%? The first is a relative move, 1% of the yield itself. The second is absolute, a full percentage point on top. "Up 100 basis points" can only mean 4.00% to 5.00%. In a market where a 3bp auction tail is a headline event, nobody wants to guess which one you meant.
A normal Fed move is 25bp and an aggressive one is 50bp. Auction tails and stop-throughs run finer than that, quoted in tenths of a bip, so you will see a 1.4bp tail. What a bip is worth in price depends on duration. On a 10-year note with duration near 8, 1bp of yield is about 0.08% of price.
CPI comes in hot and the 2-year Treasury yield jumps from 3.96% to 4.09%. That is a 13bp move, large for a single data print. Hold $100 million of that 2-year with duration around 1.9 and the mark-to-market hit is about $247,000. The arithmetic is 13 times 0.019% of $100m.
FAQ
How many basis points is 1%?
One hundred. A 25bp Fed move is a quarter of a percentage point. A 3bp auction tail is 0.03 percentage points, which sounds like nothing and means the auction went badly.