The blowout U.S. jobs report for October means the FederalReserve may be weeks away from raising interest rates. For U.S.savers earning next to nothing on $2.6 trillion of money-marketmutual funds, the move will barely register.

The reason is that there's an unprecedented shortfall in thesafest assets, especially Treasury bills — a mainstay of moneyfunds and traditionally the government obligations that are mostsensitive to changes in Fed policy. The shortage means some keymoney-fund rates will probably remain near historic lows even ifthe central bank increases its benchmark from near zero nextmonth.

The phenomenon is a consequence of regulators' efforts to curbrisk after the financial crisis. Money-market industry rules set totake effect in October 2016 may lead investors and fund companiesto shift as much as $650 billion into short-maturity governmentobligations, according to JPMorgan Chase & Co. Meanwhile, theamount of bills as a share of government debt is the lowest sinceat least 1996, at about 10 percent, and the Treasury is justbeginning to ramp up issuance of the securities after slashing itamid the debt-ceiling impasse.

“The demand for high-quality short-term government debtsecurities is insatiable and there is just not enough supply,” saidJerome Schneider, head of short-term strategies at Newport Beach,California-based Pacific Investment Management Co., which oversees$1.47 trillion. “Even given the increased bill sales coming as thedebt-limit issue has passed, it won't keep up with rising demandfrom regulatory forces. This will keep rates low.”

While the U.S. government stands to benefit as the imbalanceholds down borrowing costs, it's proving the bane of savers.Average yields for the biggest money-market funds, which buy asizable chunk of the $1.3 trillion Treasury bills market, haven'ttopped 0.1 percent since 2010, according to Crane Data. In 2007,they were above 5 percent before the Fed started slashing rates tosupport the economy.

With returns this low, investors have less incentive to sockaway cash. The Standard & Poor's 500 index has earned 3.8percent this year, including dividends, according to data compiledby Bloomberg.

The one-month bill yield was at 0.04 percent Monday in Tokyo,after touching as low as negative 0.05 percent last month. The Fedeffective rate, the average rate on overnight loans betweenbanks, is 0.12 percent.

Mary Lee Wegner, a 54-year-old Los Angeles lawyer, is amonginvestors eschewing money funds for higher-yielding choices as herfinancial adviser, Ross Gerber of Gerber Kawasaki, tells her rateswill remain low even after the Fed begins tightening.

“The Fed has forced me to become a more willing investor,because if I decided to keep a large portion of my money in savingswith the level of inflation and zero interest rates, I'm losingmoney,” Wegner said. “I don't have much of a choice but to be lessrisk averse.”

The new rules threaten to roil the industry as much as near-zerointerest rates.

Regulators are trying to make money funds more stable after the2008 collapse of the Reserve Primary Fund, as bets it made onLehman Brothers Holdings Inc. debt soured. The decline in its shareprice below $1 triggered a run on money funds that contributed tofreeze credit markets.

The new Securities and Exchange Commission measures, whichinclude redemption fees in times of market stress, apply toso-called prime funds, which can also buy corporate debt such ascommercial paper. Under the new regulations, institutional primefunds must have a floating share price.

BlackRock Inc., Federated Investors Inc. and FidelityInvestments are among asset managers changing money-fund offeringsin response to the shifting rules. They're converting prime fundsto choices focused on government securities, including bills andagency offerings. Those funds will retain the stable $1 share valuethat's been a bedrock assumption of money markets.

Bill Imbalance

Adding to the supply-demand imbalance in bills, higher capitalrequirements have led some banks to place fees on deposits, pushingsavers into short-term government securities.

“There has been tens of billions that has flowed into thegovernment money-market sector, but it's about to turn intohundreds of billions,” said Peter Crane, president of Crane Data, aWestborough, Massachusetts-based firm that tracks the industry.That pressure will “keep government and Treasury rates nailed tozero.”

The upshot is that the history of bill rates during past Fedtightening cycles won't serve as a guide this time around. The lasttime the Fed was raising rates, it pushed its benchmark from 1percent in June 2004 to 5.25 percent two years later. In thatperiod, one-month bill rates rose from about 1 percent to around4.5 percent.

Bill rates may climb more quickly if the Fed expands itsreverse repo program, or RRP, which it will use to suck liquidityfrom the financial system and guide rates higher. The RRP rate, nowfixed at 0.05 percent, will be the floor for the Fed's target band,while the interest rate on excess reserves — now 0.25 percent —will be the top. The Fed allows a maximum of $300 billion indaily use of its RRP. In these agreements, the Fed temporarilyborrows cash from counterparties using securities ascollateral.

“How big the RRP program gets will have a big impact on wherebill rates go in the Fed liftoff,” said Alex Roever, head of U.S.interest-rate strategy at JPMorgan. “That will matter to the billmarket because the Fed RRP's are going to be a substitute, andlikely a higher-yielding one, for short-term Treasury bills.”

Even though the Treasury said last week that it plans to ramp upbill sales, most investors say it still won't be enough.

“Bill rates are going to be low relative to other rates due tothe supply-demand imbalances,” said Steven Meier, the Boston-basedhead of cash, currency and fixed-income at the money managementunit of State Street Corp., which oversees $2.4 trillion. “And thisgets worse in 2016 and it gets worse quickly. Bill rates have beensticky on the downside and slow to move.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.