Sir John Templeton, the legendary investor, died this month at 95. He made many memorable observations on markets, such as: "'it’s different this time' are the most expensive words in the English language". More appropriate to current ABS markets is his "To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward". In other words, it pays to be contrarian.

AAA-rated UK prime residential mortgage-backed bonds (RMBS) were recently trading at 140 basis points over Libor. This is 14 or 15 times the yield of mid-2007. Are things really 14 or 15 times worse? These bonds are stressed to withstand depressions, not mild downturns.

In addition, prime RMBS are not over-structured-too-clever-by-half products such as CPDOs or CDO squared.

Why would a mortgage lender lend on new mortgages when he can buy AAA RMBS of excellent quality? A new portfolio, if tranched, is typically just over 90% AAA. AAA bonds are, by definition, 100% AAA and offer a wide opportunity for diversification. And most likely a higher yield.

What about investors in general? We're in the realm of the psychological rather than the logical. If you're employed, you're less likely to be fired if you go with the conventional wisdom. That leaves the opportunity for the brave to follow Sir John's advice- or indeed Warren Buffet's version, which is "Be fearful when others are greedy, and greedy when others are fearful".

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