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This article describes the relationship between treasuries shorts and treasuries market liqudity and yields:

With short positions anticipating higher yields elevated and continuing to grow, liquidity will be essential to avert a dramatic repricing lower in yield in the event of a reversal in sentiment that drives investors out of those positions.

I understand the the first clause: traders are shorting treasuries; this means they anticipate prices to drops - yields to rise.

But what does the "repricing lower in yiled... " part mean?

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  • "In the event of a reversal in sentiment" means if the "elevated ... and [growing]" number of people who are short suddenly decide to close those shorts by buying the securities. This would cause a lot of demand, and if there isn't enough supply to match (liquidity), the price may shoot up = "a dramatic repricing", causing much lower yield. Feb 18 at 4:31

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As Dave mentioned it essentially means that if liquidity decreases or is generally lacking, given the large positions anticipating higher yields (short positions); If sentiment changes such that investors believe yields will fall and thus exit their shorts, should the market be lacking the aforementioned liquidity the shift in pricing expectations exiting the higher yield expectations could cause a massive (and quick/ dramatic "snap") repricing of the bonds, which could result in even lower yields than would normally be the market equilibrium (because of the supply/ demand imbalance).

So effectively, if liquidity is lacking pricing moves can be greatly exacerbated towards lower rates than might otherwise happen if the market was more liquid.

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