The $188 billion market for Build America Bonds is set to trail the rest of municipal debt for the first time as issuers face cuts to their federal subsidies while investors bet interest rates will rise.

The taxable debt created under President Barack Obama’s 2009 stimulus plan has lost 6.1 percent this year, compared with a 3.7 percent drop for the $3.7 trillion municipal market, Bank of America Merrill Lynch data show. The bonds beat all local debt in the first three full years of their existence as they drew buyers from across the fixed-income universe.

Build America proceeds funded infrastructure projects, so the securities tend to have longer maturities. The duration has spurred sharper declines this year compared with other munis, said Dan Close at Nuveen Asset Management. Longer-dated yields have climbed since May on speculation a growing economy will lead the Federal Reserve to curb its bond buying.

“When they were issued, it made more sense for issuers to offer these as longer-dated obligations,” said Close. He runs the Build American Bond Fund and Build America Bond Opportunity Fund at Nuveen, which oversees $95 billion of local debt. “Underperformance against other fixed-income assets doesn’t have as much to do with spreads as their longer duration.”

Withdrawal Wave

Investors have yanked about $19 billion from long-term muni mutual funds this year, helping drive 30-year yields to levels unseen since 2011, and pushing them to a 20-month high relative to 10-year interest rates. The withdrawals are a reversal from 2012, when buyers seeking extra yield poured in $13 billion, Lipper US Fund Flows data show.

Bets that the Fed would taper its monthly debt purchases punished longer-maturity fixed-income obligations the most. The lengthiest muni maturities have lost 2.2 percent this year, while the shortest-dated have earned about 0.8 percent, Standard & Poor’s data show. The Wells Fargo Build America Bond index has an average maturity of about 26 years.

The bonds became the fastest-growing part of the muni market before the program expired at the end of 2010. Localities used the funds for infrastructure after the longest recession since the 1930s, receiving a 35 percent subsidy on interest costs from the federal government.

Yet states and cities now face higher interest payments on the debt amid budget battles in Washington.

Subsidy Slashed