Basis point

A basis point, often abbreviated bp or bps and pronounced "bip," measures interest rate changes and yield levels in units of 0.01%. It exists specifically because interest rates and yields often move in increments too small to describe cleanly in whole percentage points: a bond yield moving from 4.52% to 4.58% is far more naturally described as a 6 basis point move than as a "0.06 percentage point" move, even though the two phrasings mean the same thing.

Basis points show up constantly in rates markets: Fed rate decisions are quoted and debated in 25 bp increments, a quarter point, bond yield changes are tracked in bp on any given day, and credit spreads, the extra yield a risky bond pays over a Treasury, are quoted in bp as well. Reading "the Fed cut 25 bps" and "the 10-year yield rose 8 bps this week" as immediately meaningful, specific numbers, without having to convert from a percentage, is the entire reason the unit is used this consistently across fixed income and macro commentary.

The most common mistake is confusing a basis point with a percent outright: a "50 basis point move" is a 0.50 percentage point move, not a 50% move, and treating the two as interchangeable produces numbers off by a factor of 100. Basis points also describe an absolute rate change, not a relative one, so a rate moving from 2% to 2.25%, a 25 bp move, is a 12.5% relative increase, while the same 25 bp move from 5% to 5.25% is only a 5% relative increase, a distinction that matters when comparing the practical impact of a rate change across different starting levels.

Suppose the fed funds target sits at 3.50% to 3.75% and the FOMC cuts by 25 basis points at its next meeting, moving the range to 3.25% to 3.50%. Markets would describe that same move interchangeably as "a quarter-point cut" or "a 25 bp cut," both meaning the identical 0.25 percentage point change. If the Fed instead cut by 50 basis points, that's twice the size, a half-point move to 3.00% to 3.25%, generally read as a more aggressive easing signal than the standard 25 bp increment central banks typically move in.