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

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 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 1.6 percent after posting its worst fall since the 1987 crash on Thursday.

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 0.16 point to 135.75 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 0.5 basis point to 1.590 percent, crawling towards a three-month high of 1.630 percent struck on Tuesday.

The two-year yield JP2YTN=JBTC fell 0.5 basis point to 0.785 percent, while the 20-year yield JP20YTN=JBTC rose 2 basis points to 2.130 percent.

The government data showed on Friday that overseas investors sold 861 billion yen ($8.6 billion) of yen bonds in the week ended Oct. 11. [JP/CAP]

In the past three weeks, foreign investors sold nearly 3 trillion yen of yen bonds, most of which were JGBs, as the global market turmoil has prompted them to cut assets and secure cash.

That was one factor behind a slump in JGBs in the past month.

Even so, many market players expect the Japanese bond market will turn around in the medium term as growing concerns about the global recession and the persistent market turmoil will prompt investors to seek the safety of government debt. Many Japanese life insurers said in the latest Reuters interview series that they planned to increase their yen bond holdings in the October-March second half of the business year. [ID:nJPINS]