"Show me the Money!"

Credit Markets Waiting for Deeds, not Words

Thirty-year mortgage rates, which looked poised to make a run at 5% last week, now are heading the other direction. As of this morning, long-term rates for qualified borrowers are hovering around 5.5%.

What happened?

It's more like, what didn't.

The Federal Reserve and Treasury, to try to jump start housing, basically floated a trial balloon that they intended to commit hundreds of billions to buying mortgages directly from Fannie Mae and Freddie Mac. The credit markets promptly rallied in expectation of that happening.

Replay of TARP 1.0

However, 10 days later, it's not clear when -- or even if -- the money will be committed. This is more than a little reminiscent of Troubled Assets Relief Program 1.0 ("TARP"), in which the Treasury loudly lobbied Congress for hundreds of billions in emergency funds to buy banks' toxic debt, only to abandon that plan in favor of taking direct equity stakes in said banks.

If the Fed set long-term rates, market psychology -- and specifically, expectations about interest rates -- wouldn't matter.

But the Fed only controls short-term rates. Until skeptical markets actually see government money deployed, rates are likely headed north, not south.