Panic in bond market due to short squeeze

10-year bond yield closed at 6.77% even as many illiquid bonds exchanged hands in the past two days

Bond market yields dived on Thursday and Friday as traders scrambled to cover their short positions.

According to traders, investors pushed up yields sharply after the central bank kept policy rates unchanged on February 8. Yields moved up from 6.4 per cent to 6.95 per cent in less than a month. Much of the movement had happened because primary dealers and foreign banks had shorted their positions, expecting yields to rise further. As yields rise, prices of bonds fall.  The expectation was that, by Thursday and Friday, they would be buying up the bonds from the market to cover the position.