The stock market is an exciting place to be. Watching your stocks go through the highs and lows of life, while you are racking up some serious cash. The only problem with the stock market is that it can be very confusing for beginners to understand what they are looking at. One thing that many people don’t know about the stock market is Teenies. A Teenie is one-sixteenth of a basis point, which means one-hundredth of a per cent! In this article, we will take a look at how Teenies work on a more in-depth level so you can make more informed decisions on whether or not to invest in them.
What is Teenies?
In trading, a teenie is a measure of value representing one-sixteenth of one basis point. A basis point is one-hundredths of a percent. For example, if the yield on an issue moves from 0 to .002%, then that represents two teenies or 100 half points (100 x .001).
Yields can be quoted in basis points for a spot rate, say the yield on a ten-year note is 102.60 or 100 x .01026 (the sixth teenie). The implied yield on a bond with this level would be .022%, which is two basis points (.002 x 100) or one teenie.
A teenie is one-sixteenth of a basis point, where a basis point represents one-hundredth of a per cent. What does this mean for you? This means that prior to decimalization, which was the switch from using base eight over to base ten in trading standards,a teenie was the smallest amount by which a security’s price could move. What does this mean for you? Decimalization moved trading standards to base ten rather than base eight, so teenies no longer exist in the forex market.
A ten-year note, for example, can have different yields in the secondary market depending upon whether it was issued yesterday (a new issue), today (on the “run”, when dealers want to sell the note), or tomorrow (on the “off”, when dealers want to buy).
Teenies are also used in quoting yields on Treasuries, particularly for new issues. However, unlike most other securities where one basis point is equal to 100 points per $100 of face value, it takes only 50 points per $100 of face value to represent a change in yield of one teenie for Treasuries.
In the secondary market, dealers quote yields on bonds or notes based upon spreads from benchmark issues or indices such as the Treasury spot rate curve and Eurodollar deposit rates. In other words, they will report what an issue is trading at above (or below) another reference point.
For example, a dealer might quote the yield on an issue as being 100 bp over three-month Treasury bills. This means that it is trading at 100 basis points above or below what you would earn if you bought T-bills and reinvested them every 90 days for ten years. The spread, therefore, represents one teenie.
The spread is always quoted as the higher yield minus the lower, so in this example, it would be 100 bp over three-month T-bills. If you wanted to sell a note at 100 basis points below the spot and someone agreed to buy it from you, then your spread would be negative and expressed in hundredths of a per cent.
Generally, when quoting spreads in this way dealers will use decimal points. The spread on the issue mentioned above would be quoted as 100 over three-month T-bills at .25%. This means that it is trading 25 basis points below spot and 75 basis points (75/100 = .75) over bills.
This example shows how teenies are used in the secondary market. Spreads can also be quoted for bonds trading at discounts or premiums to par value, so you might see a spread of 100 over three-month T-bills plus 50. This means that it is trading 50 basis points above spot and therefore 150 (100+50) bp below par.
How Teenies Works
Prior to decimalization, teenies were the smallest amount by which a security’s price could move and the smallest unit of security that can be traded. With decimalization, however, teenies no longer exist in forex markets.
A ten-year note for example has different yields based upon whether it was issued yesterday (a new issue), today (on the “run”, when dealers want to sell the note), or tomorrow (open market operations, on the “off”, when dealers want to buy).
Yields can be quoted in basis points for a spot rate. A yield on ten-year notes is 102.60 or 100 x .01026 which means that it takes $100.26 at a yield of 102.60 to have the same value as $102 today.
Yields are typically quoted on an annualized basis, but can also be quoted on any other time period (e.g., semiannual or quarterly). A change in rates will affect future cash flows and therefore the current price for a bond.
For example, a yield of 102 means that the price is 100 x (102/100) = 100 – .02 or $98. If rates rise to 103 then the new price will be 100 x (.03/.01) which equals 99.75 and therefore a loss in current value of 0.25%.
To recap what we’ve learned, Teenies is a measure of value representing one-sixteenth of one basis point. A basis point is one-hundredth of a per cent. This blog post has given some great tips on understanding What is teenies and how does is work so please share if you find this article useful.