Investors in the $3.7 trillion municipal market should expect lower returns in 2013 than the prior two years, when local yields rallied to a 47-year low, said Peter Hayes, BlackRock Inc.’s head of muni debt.

State and local debt yields have dropped as investors sought a haven from Europe’s debt crisis and potential federal tax increases. The market earned about 18 percent in the previous two years combined, the most since the 2000-2001 period, according to Bank of America Merrill Lynch index data. From 1989 to 2010, the average annual return was 6.7 percent.

Muni investors “have been spoiled with some pretty robust total returns for an asset class that’s not typically known for that,” Hayes said in an interview at BlackRock’s office in Princeton, New Jersey. The New York-based company manages about $109 billion in local debt.

BlackRock in 2013 is “defending what clients have earned over the last two years” by avoiding longer-maturity bonds and trading lower-rated debt for securities with higher grades, Hayes said.

The company suggests paring speculative-grade holdings now, while investors still seek such debt for their higher yields. Individuals have added about $1.1 billion of assets to high-yield muni mutual funds this year, Lipper US Fund Flows data show.

The interest rate on 20-year general-obligations rose 0.13 percentage point this week to 3.67 percent, the biggest jump in six weeks, according to a Bond Buyer index. The yield fell to 3.27 percent in the period through Dec. 6, the lowest since 1965.