Reader Joe M. wrote to The Hourly G, asking a few questions that he thought might be too basic. As he wrote, “I feel many are shy or ashamed to ask the simple stuff. ”
A lot of non-finance, non-economics people are reading up on finance and economics because they’re not blind—they see that things are going badly. They want to know more, so as to understand what’s going on—but they often don’t have the tools or the language to quite get what’s going on. So they need help.
Here at THG Command Central, we gave it some thought, commissioned a year-long study, and concluded that yes, this was do-able: The Ten PM Tutorial.
We’ll be explaining basic stuff for newbies. Any newbie who has a question—or oldie, who wants a clarification of some particular point—feel free to post it in the comment section of these tutorials, and they’ll be answered in the next iteration. Since reader Joe M. asked first, here are the answers to his two questions:
Basis points: Those are literally percentage points of percentage points. Say the yield on a bond is 5%, and then rises to 5.25%: You would say, “The yield on the bond rose 25 basis points.” It sounds so much smarter than saying, “The yield on the bond rose 25% of 1%.”
Bond spread: That’s the difference in yields between two bonds. This helps to gauge relative risk in bonds. For instance, in Europe, the German 10-year bond is considered the safest there is. So relative risk of other sovereign bonds is measured against it. Thus French 10-years had a spread of 0.470 (that is, 0.47%, or in other words “The yield spread on the French 10-year over the German bond is 47 basis points.”) The spread is quite low for the French bond, signaling how the markets consider the French 10-year very safe. However, the Greek 10-year has a spread (as of this morning, I’m not kidding) of 10.99%—so clearly, Greek bonds are extremely risky, when compared to German bonds.
(BTW: You do not say “Greek bonds have a yield spread of 1,099 basis points”—that’s the surest way to sound stupid. Anything at or below 0.50%, you use “basis points”. Above that, you say “percentage”; for instance, for 0.75%, you say “three-quarters of a percent”.)
Helped? Hope so.
There’s nothing wrong with wanting to know something, or understand something better—and there is no such thing as a too-basic question. Any newbie (or oldie) who has a question, no matter how mundane or complex, I’ll be sure and try to answer it on the next issue of The Ten PM Tutorial. Just leave the question in the comment section.