Following yesterday's surprisingly strong 2 Year auction, the US Treasury pulled off another blistering auction when moments ago it sold $34 billion in 5 year paper (Cusip R77), at a high yield of 1.395%, stopping through the when issued by 0.8 bps, a surprising outcome following two consecutive tailing auctions, with a Bid to Cover of 2.60, the highest since November 2014. Incidentally, the yield of 1.395% was lower than last month's 1.41% when June rate hike odds were in the single digits.

But it was the internals where the surprise lay this time, as Indirects took down 66.6% of the final allotment, a jump from last month's 58.5% and well above the 58.5% TTM average. It was also the third highest Indirect award on record as foreign central banks just can't seem to get enough of US paper. And since Indirects stormed, and Directs also saw a pick up in their allotment, rising from 6.8% to 11.6%, the Dealer award of 21.8% ended up being not only over 10% below the recent average, but also the lower Dealer award on record.

With such dramatic demand for US Treasury paper just a month ahead of the putative Fed rate hike, one wonders just how much flatter the yield curve will end up if indeed the Fed does hike and pushes the ultra-short end higher by another 25 bps as the long end continues to grind lower.