“It’s possible we could continue to rally, but that idea is becoming much less believable,” Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors, said this week. “That we have broken through these levels is remarkable.”

Fabian correctly predicted at the start of the year that muni yields could extend declines from near four-decade lows at the time because of slowing defaults and increased refunding.

Investors have added about $49 billion to muni mutual funds this year, the most since 2009, Lipper US Fund Flows data show. That includes $4.6 billion in the past four weeks, fueled by bets that Obama will increase the top federal income-tax rate to 39.6 percent from 35 percent.

Based on potential tax increases, Janney Montgomery Scott predicts munis have room to outpace Treasuries again in 2013. Tax-exempts have earned 9 percent this year, compared with 2.7 percent for Treasuries.

Yields on benchmark 10-year munis fell to 1.4 percent yesterday, the lowest for a Bloomberg Valuation index that began in January 2009. The interest rate on similar-maturity Treasuries touched a record-low 1.379 percent in July.

Lowest Yield

The lowest forecast in the Bloomberg survey was for a 10- year Treasury yield of 1.5 percent at the end of next year.

“We’ve been hit over the head for about 12 years now about how rates have to go up from here, and they’ve done nothing but go down,” said Rafael Costas, co-director of munis at San Mateo, California-based Franklin Advisers Inc., which manages about $85 billion in local debt.

Still, “it’s hard to make an overly bullish case from where we are now,” he said.

As munis outpaced Treasuries in the past month, the ratio of 10-year local yields to those on federal securities sank to about 86 percent last month, the lowest in more than a year, signaling munis were relatively expensive.