Since the beginning of February, the demand for short-term liquidity seems to have increased. The 1-month T-bill auction results point to yields significantly below the SONIA swap rate, as you can see in the chart below. This is not the case for the 3-month and 6-month auctions.
We see two reasons for increased demand in shorter tenors. Firstly, since Trump’s inauguration, uncertainty and volatility in financial markets rose, supporting a shift towards the most liquid instruments. Secondly, the flattening of the money market curve reduced the relative yield benefit of going further out the curve.
We still see value in allocating further out the curve if liquidity permits, also because the spread above SONIA offers an attractive premium. An economic slowdown on the back of global policy uncertainty could help flatten the curve further and compress the T-bill spreads.