JPMorgan Securities analysts continue to recommend investors stay overweight in MBS vs. swaps, but warn of a possible tightening of five to 10 basis points in the spread. Analysts said the mortgage market is often hurt more "by extension than by contraction" and the level of Federal Reserve holdings in the space has mitigated extension risks. "The extension borne buy the market is roughly half as much as it was in summer of '09," according to JPMorgan analysts. A survey by the analysts showed more money managers are buying MBS to cover short positions of late, as just 37% of respondents were underweight in MBS, which is down from 65% this summer. But most of the changes were back to neutral and the managers are still net underweight in the market, analysts said. "We estimate that there is still about $200 billion in buying that needs to occur for this community return to neutral," JPMorgan said. "Fundamental value in MBS is still reasonably attractive. Consequently, we believe mortgages still have some room to tighten in the near term, but we expect that they will face a headwind of issuance over the next year from traditional issuance as well as runoff from the Fed portfolio." Meanwhile, Bank of America Merrill Lynch analysts remain bullish on Agency MBS and CMBS, despite the recent rise in interest rates and overall rate volatility. Write to Jason Philyaw.