JPMorgan Securities said mortgage-backed securities spreads have been volatile lately but analysts continue to believe the sector remains "fairly attractive." Analysts said the thinness of the market was evident in the 20-basis point swing during trading Thursday, and dealers are reducing risk, while the Federal Reserve is done purchasing MBS this year and hedge funds are less active as 2010 winds down. "The good news is that mortgages are fundamentally attractive, turnover assumptions have become extremely conservative and MBS have cheapened versus corporates," according to analysts. "The bad news is that rates are still near recent highs (and) every measure of (volume) has surged." JPMorgan said the sector has become more expensive to short because of the sell off, which led mortgages to extend. "We believe spread tightening will be limited, and the performance of the sector will likely be directional, contributing to long durations," the analysts said. "We maintain a modest overweight but recognize the waters will be choppy." Meanwhile, JPMorgan Securities said the recent report from the Basel Committee on Banking Supervision that showed banks face considerable capital shortfalls in trying to comply with mandates in Basel 3 "likely overstates the shortfalls." Analysts said there is still a lot of interpretation within the rules and banks may not consistently apply the rules among peers, especially regarding liquidity-related measures. "We continue to believe that banks will proactively move to comply with the rules much sooner than the implementation timeline," the analysts said. "Specifically we expect banks to de-lever the balance sheet, reconsidering businesses and assets that are capital intensive and less liquid." Banks have until Jan. 1, 2019, to fully comply with the new standards, which include among other things boosting common equity ratios and the capital-conservation buffer. In late October, a committee formed by the Bank for International Settlements questioned if banks can meet the new standards, and last week reports surfaced that some of the largest financial institutions in the world face a nearly $800 billion shortfall in capital. Write to Jason Philyaw.