He’s been buying so-called dirt bonds—bonds backed by homebuilding and land—for his Nuveen High Municipal Bond Fund (NHMRX), which returned 21.2% in 2012.
The debt in the fund is rated BBB+, three steps above junk status, with the reasoning that home builders broke ground on the most houses last year since 2008. Still, land-secured debt makes up almost half of the municipal issues that are currently in default.
That could mean the sector’s worst days are behind it. The fund is buying tax-allocation debt backed by property taxes.
Investors have been gobbling up higher risk debt as they seek returns in an historically low interest rate environment.
Land developers pay special assessments to pay back the debt and credit spreads have narrowed. That doesn’t counter the fact that land-based debt is the riskiest segment of the muni market.
Other areas that have produced higher municipal returns include tobacco bonds at 32% that benefited from tobacco-settlement payments from cigarette makers, airline bonds, healthcare securities, and bonds backed by industrial development.
The housing market is still showing signs that momentum will increase. Builders started new homes in December at the highest rate since June of 2008. Although most of the gains were realized in 2012, analysts say savvy bond-buyers still have room to enjoy gains on good value.

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