The three-pronged assault on Congress by President George W. Bush, U.S. Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry M. “Hank” Paulson to push for speedy passage of the proposed $700 billion banking bailout package is making headway, causing investors to turn bullish in anticipation of federal intervention.

By 10:45 a.m. in New York today (Thursday), all three major U.S. indices had huge jumps, as optimism that Congress would soon come to an agreement on the proposed bailout legislation buoyed U.S. markets.

The blue-chip Dow Jones Industrial Average Index gained 195.62 points (1.81%), to trade at 11,020.79. The tech-laden Nasdaq Composite Index shot up 35.05 points (1.63%), to 2,190.73. And the broader Standard & Poor’s 500 Index rose 19.61 points (1.65%), to reach 1,205.48.

That same optimism had the opposite effect on oil, putting downward pressure on prices. Light, sweet crude oil fell $1.28 to $104.45 per barrel this morning, according to MSNMoney.com data.

Two-year Treasury notes, typically the most sought after during times of high uncertainty and stress, saw a 6-basis point drop in yield this morning to 2.07% — another sign that the both the equity and bond markets are counting on some action from Congress and soon.

Meanwhile, Fed funds futures are pricing in a 96% probability that the Federal Reserve will vote to cut its key interest rate by a quarter point to 1.75% from its current 2.0% level at the next scheduled meeting of the Federal Open Market Committee on Oct. 29, MarketWatch reported. The likelihood of a cut has increased as the week has progressed. On Monday, Fed funds futures predicted only a 32% chance of such an interest rate decrease.

Volatility Remains High

This morning’s gains completely reversed the losses of yesterday (Wednesday).

But the market’s wild swings in the last several days will likely continue, as investors watch and wait for some indication from Capitol Hill on the ultimate fate of the proposed $700 billion bailout legislation.

The CBOE Volatility Index, or VIX index, is a measure of “investor sentiment and market volatility.” Using real time options prices, it is often used as a measure of fear in the market. The higher the VIX goes, the more fear in the market as investors utilize options to hedge positions.

“Up until last week, when the VIX volatility index spiked above 30 during the current bear market, it always came back down within a day or two,” Bespoke Investment Group said in a research report released this morning. “Last week, however, the VIX moved above 30 and has stayed there for 9 days now.”

Investors aren’t the only ones scared at the moment. Treasury Secretary Paulson is counting on lawmakers’ fear of inaction to push through his proposed bailout legislation.

“The strongest motivation for Congress is to avoid being blamed for major disasters, and that’s powerful leverage,” C. Fred Bergsten, director of the Peterson Institute for International Economics, told The Wall Street Journal. “If the Congress fails to act on this, the blame really falls on them for bringing down the financial markets and perhaps the world economy.”

Bush Backs Paulson’s Plan

President Bush addressed the nation last night and tried to explain the crippling credit crisis, and why the costly bailout plan was needed, to the American public.

“We’re in the midst of a serious financial crisis,” Bush said in a nationally televised address, MarketWatch reported. “Our entire economy is in danger,” as a result of the credit crunch, he said, and inaction on the plan could result in a “long and painful recession.”

The high price tag for the $700 proposed bailout has triggered fear and disbelief with many voters. But Bush did his best to reassure the nation that taxpayer funds are in good hands at the Treasury Department.

“We expect that much if not all of the tax dollars we invest will be paid back,” Bush said.

All signs point to the Democrats and Republicans being close to reaching an agreement as Bernanke and Paulson continue to make the rounds both behind closed doors and in Senate testimony urging quick action to avoid a Great Depression-like fate for the U.S. economy.

“The package is basically done,” Representative Paul Kanjorski, a Pennsylvania Democrat, told CNBC today, Bloomberg News reported. “The hard issues are resolved. They have to shake hands. They have to smile and they have to have the photo set.”

Investors and politicians alike are hoping for a resolution before the end of the week.  With time running out to meet this self-imposed deadline, House of Representative and Senate legislators are meeting this morning to iron out the final details to the proposed legislation, hoping to strike a balance between taxpayer safeguards and market-boosting benefits.

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