Definition of basis point BPS

A basis point is one hundredth of one per cent (0.01 per cent), so 100 basis points (bps) is equal to 1 percentage point.

If a bond yield were to increase from 1 per cent to 2 per cent, it is said to risen by 100 basis points (bps) or one percentage point.

A common confusion would be to describe the increase above as a 1 per cent rise, rather than a one percentage point rise. Using basis points (bps), or "bips" as they are known colloquially, avoids any ambiguity.[1]

Bond spreads, the difference between bonds of similar quality and different maturities, or of different quality and the same maturity, are usually expressed in basis points (bps). Basis points are also used to express percentage changes in costs or prices of other securities, such as mortgage loans.

 

Basis points (bps) in the news

At the end of 2012 analysts were predicting an end to the bond bull run. The risk-free rate – that is, the yield on benchmark Treasuries – was said to be mispriced as a result of buying by the US Federal Reserve. However, spreads between corporate bonds and Treasury yields remained above their historical averages. 10-year triple B rated corporate debt yielded an average 180 basis points (bps) more than the equivalent Treasury level, a spread that was much tighter at 130 bps in 2007.

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