Now that the Fed raised rates, where to score the best yields on your cash

The Federal Reserve unanimously raised the federal-funds target range by 25bps to 3.75%-4.00%, its first rate hike since July 2023, improving prospective returns on cash holdings. T-bill yields should adjust immediately, while high-yield savings rates and money-market fund yields may rise with a lag; the largest taxable money-market funds had a 3.79% annualized seven-day yield as of Tuesday. Investors should weigh liquidity, taxes and duration across T-bills, CDs, savings accounts and money funds, as inflation and taxes can erode real after-tax returns.

Analysis

The relevant equity implication is not higher policy rates per se, but the widening gap between wholesale cash yields and what banks must pay to retain deposits. For BAC, aggressive digital-bank and brokerage cash alternatives raise deposit beta faster than asset yields can reprice once loan growth slows; unchanged near-term NII commentary should therefore be read as a cost-control/hedging outcome, not evidence that further hikes are accretive. The first-order beneficiaries are Treasury-bill ETFs (SGOV, BIL) and asset managers with large money-market complexes (BLK, BEN, TROW), where higher balances and fee-bearing AUM can persist even if the Fed later eases.

Over the next 1-3 months, monitor weekly H.8 deposit data, money-market-fund assets, and BAC’s interest-bearing deposit cost versus its yield on earning assets. Continued migration from bank deposits into funds would pressure system liquidity and make regional-bank funding more expensive than for money-center banks; KRE is more exposed than BAC because smaller banks have less operating-deposit stickiness and fewer low-cost transaction balances. A reversal requires either a rapid easing pivot, a material decline in bill yields, or clear evidence that deposit outflows have stabilized without additional promotional pricing.

The consensus likely overstates the benefit of cash yields to consumer-facing banks while understating the duration of money-market asset retention. Cash that has moved into brokerage sweep vehicles and bill ETFs is frictionless to keep there, particularly if investors expect elevated rates for several quarters. The structural loser is deposit-funded lending capacity: if funding costs remain high, banks will preserve margins by tightening credit, creating a 6-18 month headwind for rate-sensitive consumer credit and smaller-business lending rather than an immediate broad-bank earnings windfall.

Key Decisions for Investors

• Maintain a 1-3 month relative-value position long SGOV or BIL versus idle bank-deposit exposure; this is a carry/liquidity allocation rather than a directional duration trade. Reassess if 3-month bill yields fall more than 75 bp or money-market assets begin contracting for four consecutive weeks.
• Pair trade over 3-6 months: long BLK versus short KRE. The thesis is persistent cash migration benefiting fee-bearing money-market AUM while regional banks absorb disproportionate deposit-cost pressure; target 10-15% relative return, with a stop if KRE outperforms BLK by 8% following deposit stabilization.
• Do not add to BAC solely on the rate increase. Upgrade only if the next earnings release demonstrates interest-bearing deposit-cost growth below asset-yield expansion and management raises NII guidance; otherwise, BAC is a lower-risk funding proxy than KRE but lacks a clean positive catalyst.
• Watch leveraged-credit floating-rate vehicles (BKLN, JAAA) rather than treating them as cash substitutes. Attractive carry can weaken if high rates translate into rising loan defaults; avoid incremental exposure if leveraged-loan default expectations rise above roughly 4% or CLO equity cash flows begin to divert.