Wells Fargo Securities writes in its "Daily Short Stuff," "Bill Paydowns in April, But Supply Remains Extremely Elevated." Author Garret Sloan says, "Despite the pay downs in the bills market, we are still in a period of elevated bill supply. March month-end showed that bills outstanding sat at $2.284 trillion, the highest outright level of bills on record. In November 2008 the total amount of bills outstanding reached a peak of $1.998 trillion. After accounting for the April bill paydowns, bill market supply will sit at $2.164 trillion, or $166 billion above the level of bills outstanding at the peak of the financial crisis. This should provide some context into why bill yields are trading so high relative to OIS and the Fed RRP, despite the recent paydowns. In fact, the current 3-month T-Bill/OIS basis has reversed course and is trading back in positive territory. The basis is currently trading at +5.5 basis points, which is 3.2 basis points shy of its March peak." He explains, "Typically the T-Bill/OIS basis trades negative, and until February of this year it had not traded positively since February 2009, right around the previous peak in T-Bill supply, so the current positive momentum in T-Bills vs. OIS may explain just how much of the LIBOR-OIS story is being directed by the Bills market. If the long-term average 3-month T-Bill/OIS basis is -10 basis points and the current basis is +5.5 basis points we might reasonably attribute approximately 15 basis points of the widening in LIBOR/OIS to T-bills. The crowding out effect of additional T-bill supply, coupled with the increase in CP supply and repatriation-related demand reductions from worldwide credit investors may be attributed with the remaining 15-20 basis points of widening."

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