Basis Point
One one-hundredth of a percentage point (0.01%), used as the standard unit of measure for interest rates, bond yields, and spreads.
What is Basis Point?
A basis point (bps, pronounced 'bips') equals 0.01%, or 1/100th of a percentage point. One hundred basis points equals 1%. Basis points are the standard unit of measurement for interest rates, bond yields, credit spreads, and changes in monetary policy. They eliminate ambiguity that arises from using percentage language: if a rate rises 'one percent,' it is unclear whether this means 1 percentage point (e.g., 5% to 6%) or 1% of the existing rate (e.g., 5% to 5.05%). Saying 'rates rose 100 bps' is unambiguous — they rose 1 percentage point. The Federal Reserve raises or lowers the federal funds rate in increments of 25 bps (0.25 percentage points), 50 bps, or occasionally 75 bps. Bond managers, swap traders, and mortgage lenders all use basis points in daily communication.
Example
The Federal Reserve raised the federal funds rate by 75 basis points (0.75 percentage points) at each of four consecutive FOMC meetings in 2022 — from 2.25% to 4.50% over the second half of the year. This represented the most aggressive tightening cycle in 40 years. Mortgage rates tracked the moves, rising roughly 300 basis points (3 percentage points) in 2022 and dramatically reducing housing affordability.