US bond market to fall further

The withering US municipal bond market will shrink even more next year, with interest rate and credit risks keeping both investors and borrowers away.

Barring an unforeseen turnaround in the final weeks of 2013, municipal bonds will po st their first negative annual performance since the financial crisis began, with investors fleeing municipal funds at a record pace and the market’s overall size, now less than $3.7 trillion, contracting for a third straight year.

Analysts, portfolio managers, and traders say concerns about the Federal Reserve scaling back its massive stimulus, and about the financial soundness of state and local governments, will keep hitting the market at least through the first half of next year. They expect debt issuance to fall further and investors to continue exiting bond funds.