I am trying to understand whether everyone needs to be long or flat when a bond is redeemed, or being short a bond at that time is also not an issue
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$\begingroup$ If we're talking regular bond with no optionality features, then I'd say it makes no sense whatsoever to be short a bond just before redemption. If you want to bet on the principal not being repaid, it'd make more sense to buy the CDS (if it trades). If the CDS does not trade, then shorting the bond would not help, because the default occurs "after" the maturity date, by which time you'd need to return the bond. Also, I don't think a counterparty would allow you to borrow a bond that is about to expire. $\endgroup$– Jan StullerOct 27, 2021 at 9:40
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$\begingroup$ If the bond is callable, then indeed, shorting it does present an operational risk if it is suddenly called, as everyone short the bond would probably rush to try to cover the short in the market. $\endgroup$– Jan StullerOct 27, 2021 at 9:41
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$\begingroup$ In principle I do not see why it would be an issue. You will have to refund the bond to the person you borrowed it from. And you are done. But don't listen to me, you should check with someone who has experience in the specific bond market (US treasuries, etc.) that you are dealing with, find out what the rules and procedures are. $\endgroup$– nbbo2Oct 28, 2021 at 9:56
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