How are we going to fund this debt?

The funding of the Treasury debt is going to be one of the most important capital market issues for Treasury. Of course, the TARP will be more important in the short-run, but how debt is funded will impact debt markets for years. The Treasury Borrowing Advisory Committee provides a good insight for what is in store for the next few years. The answer is somewhat obvious, bigger auctions and more of them to fill all maturities.

Some key highlights:

• The funding may be $3-$4 trillion in in 2009-2010 period.
• Market saturation is going to be a problem. There is $150 billion of FDIC issued paper that has been issued.
• 55% of the debt is held by foreigners up from a 1/3 only a few years ago.
• There are only 17 primary dealer down from 30 just a decade ago.

There was little talk in the minutes about the saturation issue which may be the most important. We will have to have more discussion on the old issue of crowding out.