“I had actually expected BABs would weaken early in March because people would focus on sequestration,” said Kathleen McNamara, a municipal strategist in New York at UBS Wealth Management, which oversees about $90 billion in local debt. “Enough investors felt that these issuers of BABs would be able to withstand the subsidy cut.”

Build America Bonds have returned 0.7 percent this year, outpacing the 0.4 percent gain for all munis and the 0.5 percent loss on Treasuries, Bank of America Merrill Lynch data show. The muni securities are on a pace for a record fifth-straight quarter of earning more than the broad market.

Maryland BABs

Even Build America Bonds from states most imperiled by federal cutbacks rallied this month. A Maryland security maturing in 2024 traded March 20 with the highest volume since September 2010, and at an average yield of 2.51 percent, the lowest ever, data compiled by Bloomberg show.

Maryland, which borders the nation’s capital, is one of four Aaa rated states Moody’s Investors Service has on negative outlook -- the same as the U.S. -- because they’re “highly dependent” on federal employment or transfer payments.

One exception to the rally has been Build America Bonds with features known as par call provisions. John Hallacy at Bank of America and Tom Weyl at Barclays Plc were among analysts who wrote reports warning a portion of Build America Bonds could be repurchased below market prices because of subsidy cuts.

Columbus, Ohio, the state capital, was one such issuer to sell debt with a par call provision. A bond maturing in 2023 traded March 14 at an average yield of 4.1 percent, up from 2.61 percent at the start of the year, Bloomberg data show. The price has dropped to about 106 cents on the dollar from 115 cents.

Fast Forward

Obama last month called for new securities called America Fast Forward Bonds to boost state and local government spending on infrastructure projects. They would be similar to Build America debt.

After seeing promised grants cut back, states and cities will be less keen to use such a program, McNamara said. The scarce supply of Build Americas will only further enhance their appeal to investors, she said.