JGB futures hit 3-month low as Nikkei rebounds

* High volatility in stocks keeps bond investors cautious

* JGBs seen rising in medium term on solid investor demand

* Fall in repo rates encourages short-term note buying

By Rika Otsuka

TOKYO, Oct 17 (Reuters) - Japanese government bond futures hit a three-month low on Friday, hurt by a rebound in the Nikkei share average a day after its worst fall since the 1987 crash.

JGB futures rose in early trade a day after an auction of five-year note showed solid investor demand for safe-haven government debt on growing concerns about a global recession.

But futures soon headed south as the Nikkei share average .N225 rose 1.5 percent, rebounding a little from Thursday's 11 percent dive.

Traders said investors remained on the sidelines, afraid of being caught in unusually high volatility in the market. Trading volume was thin, exaggerating market movements, as a result.

"Many bond investors are sitting on their hands as both the U.S. and Japanese stock markets remain very volatile," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

December 10-year futures 2JGBv1fell 0.23 point to 135.68 after striking a three-month low of 135.61. The lead contract climbed as high as 136.25 in early trade.

The benchmark 10-year yield JP10YTN=JBTC edged up 1 basis point to 1.595 percent, crawling towards a three-month high of 1.630 percent struck on Tuesday.

Finance Minister Shoichi Nakagawa said on Friday he wants an emergency adjustment in mark-to-market accounting rules to avoid systemic risks emerging in the financial system. [ID:nTKU003103]

The news made investors reluctant to take positions as they wanted to figure out the consequences for JGBs first, traders said.

Concerns about a possible increase in debt supply from the government to finance an economic stimulus package are also keeping investors cautious.

Economic Minister Kaoru Yosano said on Friday construction bonds could be issued for new steps to help the economy if there were public works projects that were justifiable. [ID:nTKB003076]

Short-dated notes rose as the repo market normalised a bit in response to global authorities' efforts to thaw money markets.