Basis in Bond Trading

A basis point (often abbreviated as “bps” or simply “basis”) is one-hundredth of a percent—0.01%. When traders say the Fed raised rates by 25 basis points, they mean a 0.25% increase. Basis points are standard in bond markets because they allow precise discussion of small yield changes that would be awkward to express in percentages.

Basis point arithmetic

One basis point = 0.01% = 0.0001 in decimal form. One hundred basis points = 1%. A bond yield moving from 3.50% to 3.75% has risen 25 basis points. This is written as “+25 bps” or “+25 bp.”

Traders prefer basis points because fractional percentages are common in bond markets. Rather than saying “the yield rose 0.0025 to 0.003 of the bond’s value,” traders say “it rose 25 bps,” which is clearer and quicker to communicate.

Basis and bond prices

Because bond prices move inversely with yields, a yield change of 10 basis points translates to a price change that depends on the bond’s duration. A 10-year bond with a duration of 8 years will lose roughly 0.8% of price for each 10 basis-point rise in yield. The relationship is approximately: price change ≈ –duration × yield change (in decimal form).

For example, a 0.10% (10 bps) yield rise → price change ≈ –8 × 0.001 = –0.008 or –0.8% for that 10-year bond.

Spreads quoted in basis points

Credit spreads and option-adjusted spreads are quoted in basis points. A corporate bond “trading 150 bps wide” of a comparable Treasury means it yields 1.5% more. When spreads widen during crises, traders might say “spreads blew out 200 bps,” meaning the spread increased by 2 percentage points.

Bid-ask spreads in basis points

The bid-ask spread on Treasury securities is quoted in basis points (fractions of a basis point for liquid maturities). A “tight” spread on 10-year Treasuries might be 1-2 bps (0.01-0.02%); a “wide” spread during stress might be 10-20 bps.

For less-liquid bonds, spreads are wider—perhaps 50-100 bps or more. The basis point convention allows investors to quickly gauge liquidity and trading cost.

Basis in Fed policy communication

The Federal Reserve announces rate changes in basis points. A “50 basis point rate cut” is a 0.5% reduction in the Federal Funds Rate target. This language is standard across central banks and financial institutions globally.

Relationship to “basis” in tax and accounting

In financial reporting and tax contexts, “basis” can also mean “cost basis”—the original purchase price of an asset for tax purposes. This is different from basis points. Context determines which meaning applies.

Why basis matters for investment decisions

Basis points matter because they affect returns. A 10 basis-point difference in Treasury yield across maturities shapes bond ladder returns. A 5 basis-point difference in expense ratios between two bond ETFs compounds significantly over decades.

Professional investors and institutions think in basis points instinctively. Retail investors benefit from understanding the unit because it makes market commentary clearer and helps with precise return calculations.