JGB futures rally to 3-wk high on solid 5-yr sale

* 5-yr JGB auction draws solid demand, offsets fiscal worries

* 10-yr yield down 10.5 bps from 5-mth high hit this week

By Shinichi Saoshiro

TOKYO, Nov 11 (Reuters) - Japanese government bonds rallied on Thursday, with 10-year futures jumping to a three-week high, as the market took heart in the solid results of a five-year debt sale after a string of poorly received auctions.

The 2.4 trillion yen ($27 billion) five-year auction helped allay concerns over Japan's fiscal situation that had sent the benchmark 10-year yield to a five-month high earlier in the week.

The auction's bid-to-cover ratio, a gauge of demand, rose to 3.7 from 2.17 at the previous auction in October and was the highest since the September tender. The tail, the difference between the lowest and average prices and used as another gauge of an auction's success, tightened to 0.02 from 0.04. TENDER01

"Recent JGB selling had gone a little too far," said Nobuto Yamazaki, a fund manager at DIAM Asset Management.

"Investors are still worried about what next year's budget will look like, but if the government can pull it together and keep bond issuance somewhat under control, then the market will settle down and yields could pull back even further."

December 10-year futures jumped 0.48 point to 138.34, having hit a three-week high of 138.38. They touched a three-month low of 137.29 on Monday.

The two-year yield dipped half a basis point to 0.250 percent JP2YTN=JBTC. The five-year yield JP5YTN=JBTC fell 2.5 basis points to 0.685 percent.

The benchmark 10-year yield fell 4.5 basis points to 1.380 percent, pulling sharply away from a five-month high of 1.485 percent struck earlier in the week.

The more than 10 basis-point slide in the benchmark 10-year yield this week was initiated by comments by officials earlier in the week that the government must ensure its spending plans did not rattle bond investors' confidence. [ID:nT218318]

The two- to 10-year yield spread tightened by 4.5 basis points to 113 basis points according to Reuters data. It hit a 3-½ year high of 121 basis points earlier this week. (Additional reporting by Stanley White; Editing by Chris Gallagher)