Dec. 4 (Bloomberg) -- Money-market mutual funds that buy mostly U.S. Treasuries are starting to turn away new investors as the lowest yields on government debt in 50 years pull down returns for shareholders and squeeze managers’ fees.

At least three Treasury money-market funds run by JPMorgan Chase & Co., Evergreen Investments and Allegiant Asset Management recently stopped taking outside cash, according to Web site notices and regulatory filings. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings. Higher fund yields also prop up management fees.

Yields on three-month Treasury bills approached zero this week, driven by demand from investors fleeing falling stock and bond markets and anticipating more rate cuts as the Federal Reserve seeks to revive the economy. Yields have dropped so fast that Treasury money funds now have higher returns than Treasuries, helping to more than double assets to $286 billion in the past three months.

“These are clearly extraordinary circumstances,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts. “Normally, you don’t see differences between the direct market and the money funds that are enough to move the needle.”

As of Tuesday, institutional money market funds that invest in Treasuries and related repurchase agreements had an average seven-day yield of 0.17 percent or 17 basis points, down from 160 basis points at the beginning of September, according to iMoneyNet, another Westborough research firm. At current levels, a $1,000 investment would earn $1.70 over the course of a year.

Lower Yields

Treasury bills that mature in three months have a current annual yield of about 6 basis points, according to Bloomberg data. Money-market funds that take in new cash would have to buy Treasuries at these levels, dragging down their overall payout.

“We just want to maintain a yield that ensures fairness to all the investors in the fund,” said Laura Fay, a spokeswoman for Evergreen. The company has offices in Boston and Charlotte, North Carolina, the headquarters of parent Wachovia Corp.

According to Dec. 1 notices, the Evergreen Institutional 100% Treasury Money Market Fund, which had assets of $1.9 billion at Sept. 30, and Allegiant Treasury Money Market Fund, with about $1.3 billion under management, both temporarily closed to new investors. Allegiant Asset Management is a unit of Cleveland-based National City Corp.

Some Treasury funds closed to new investors in September, the last time yields plummeted, only to reopen later, said Peter Rizzo, director of fund services at Standard & Poor’s in New York.

‘Flooded With Money’

The $42.7 billion JPMorgan 100% U.S. Treasury Securities Money Market Fund has remained closed to new purchases since Oct. 2, fund manager Wendy Fletcher said in an interview.

“We were just flooded with money,” said Fletcher, whose fund offered a 0.06 percent return on its most expensive share class as of yesterday, down from 3.11 percent a year ago, according to data compiled by Bloomberg. “I can’t remember seeing this kind of market ever.”

JPMorgan’s decision was also influenced by concern that the torrent of investors might reverse, forcing the fund to sell securities at a loss to meet redemptions, Fletcher said. While the fund has come under pressure from investors to reopen, it will stay shut into next year, she said.

“We knew that if we opened the fund it would get another flood because people want to get extra clean for year-end,” she said, referring to the desire of corporate investors to show liquid balance sheets when they report to shareholders.

Goldman Sachs Fund

An online trading portal run by Dallas-based Comerica Inc. yesterday listed the JPMorgan fund and Goldman Sachs FS Treasury Instruments Fund as being closed to new investors. The notice was taken down by 3 p.m. New York time.

Melissa Daly, a spokeswoman for Goldman Sachs, said the fund was open to investors and declined to comment on why the Comerica Web site had listed the fund as closed.

The stampede into Treasuries began with this year’s credit crunch and accelerated after Sept. 16, when the $62.5 billion Reserve Primary Fund announced that its losses on debt issued by the bankrupt Lehman Brothers Holdings Inc. would push its net asset value below $1 a share. It was the first time in 14 years that a money-market fund had dropped under that level, marring the industry’s reputation as the safest investment category after bank deposits and U.S. Treasuries.

Over the ensuing three weeks, institutions yanked about $347 billion out of prime money markets that invest in corporate debt and plowed almost $300 billion into those that hold only U.S. government paper, according to iMoneyNet.

Fed Action

The growth in Treasury funds was slowed in November by declining yields and increasing investor acceptance of prime funds that held corporate debt backed by the U.S. government under new federal bailout programs.

Government money-market funds might continue to face falling Treasury yields as the Fed seeks to revive the economy. Fed Chairman Ben S. Bernanke said Dec. 1 that further cuts in the central bank’s benchmark interest rate are feasible. The Fed might begin to buy back longer-term Treasuries, he said. That step would raise prices and push down yields.

If the Fed keeps reducing rates, asset-management firms will have to decide whether to waive their management fees for Treasury funds “to keep yields in positive territories,” said Rizzo, the S&P analyst.

Some money-market funds that invest in Treasuries may seek to increase their yields by delving into bank debt backed by the Federal Deposit Insurance Corporation, Crane said.

FDIC

Companies such as Goldman Sachs, Morgan Stanley and JPMorgan have sold $38.6 billion of government-backed bonds since Nov. 21, when the FDIC strengthened its Temporary Liquidity Guarantee Program to ensure timely payment of principal and interest in the event of default.

Douglas Scheidt, an associate director in the SEC’s investment-management division, said in an interview that he has received calls from lawyers representing money-market funds asking whether the FDIC-backed debt would qualify as government securities.

“From what we can tell, the FDIC guarantee would be a government guarantee, so it would be a government security,” said Scheidt, whose division regulates money market funds.

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net; Christopher Condon in Boston at o ccondon4@bloomberg.net

Last Updated: December 4, 2008 13:10 EST