SHANGHAI/SINGAPORE, Sept 28 (Reuters) - China's government bond investors are betting that a surge in yields in the past month, driven by concerns of accelerated bond issuance, is overdone and prices will rise again as funding conditions ease in the fourth quarter.

As China heads into a week-long national holiday break on Friday, bonds appear to be recovering after a month during which 10-year yields rose to 2.74% from 2.53%.

That rise in yields followed a slew of stimulus measures that stoked the possibility of an economic rebound as well as heavier bond issuance by local governments.

China's weak post-pandemic recovery had caused a long streak of bond-buying earlier this year, with 10-year yields falling 34 basis points (bps) between February and August.

"We expect interbank funding conditions to ease in October and for net central government bond supply to decline in Q4, after the surge in Q3," said Pin Ru Tan, head of Asia rates strategy at HSBC.

Tan expects more monetary easing. "The bond bull run has not ended. It has just taken a temporary reversal," she said.

Expectations of heavy bond supplies have been driving yields higher. China accelerated the issuance of special bonds in September, aiming to complete raising 3.8 trillion yuan ($519.8 billion) by the end of the month.

Meanwhile, local governments are expected to issue special refinancing bonds in the fourth quarter, which could be used to swap out the debt of local governments.

The yield on one-year yuan bonds climbed to a 5-month high in September. The 7-day repo rate is also near its strongest since March.

"Funding cost was really high in September," said Zou Wang, investment director at Shanghai Anfang Private Fund Management Co.

Zou said his fund plans to buy more securities, such as the one issued by China Development Bank and maturing in January 2028, if funding conditions ease after the Golden Week holidays.

Wang Chen, research analyst at China Chengxin Credit Rating Group, said current economic conditions do not warrant higher rates as China's private economy is facing refinancing pressures and policymakers are working to resolve local debt risks.

Short-term policy rates also show bond yields are out of sync with other monetary guidance. The rate on the one-year medium-term lending facility (MLF) has fallen 25 bps this year and some investors expect the rate to go even lower. The spread between 10-year bond yields and the one-year MLF is at its widest since February.

"I think we are in the middle of a bond bull market," said Gu Weiyong, chief investment officer at asset manager Ucom Investment Co.

Making the case for rates to stay low and supportive of growth, Gu said the heavily indebted local government financing vehicles (LGFVs) will take a hit if rates rise.

"What about LGFVs if interest rate rises? Would banks still be motivated to give out loans? All of these are problems," Gu said. ($1 = 7.3100 Chinese yuan) (Reporting Li Gu in Shanghai, Tom Westbrook in Singapore; Additional reporting by Samuel Shen; Editing by Vidya Ranganathan and Jacqueline Wong)