U.S. short-term debt came under heavy pressure on Thursday as borrowing costs reached an 11-month high, and one analyst believes that investors should be warned that this volatility could spread into other assets markets.
"Take a look at the very short end of the U.S. Treasury curve and you see panic," Kathleen Brooks, a research director at Forex.com said in a research note on Thursday afternoon.
"The prospect of a default in the world's richest economy may sound preposterous, but investors are starting to price in the unexpected. It is worth keeping an eye on the very short end of the Treasury curve, as further nervousness here could spill into other markets."
The political deadlock in Washington entered its fourth day on Friday with traders having to survive without the release of U.S. nonfarm payrolls data. Growing fears that the budget deadlock could run on, potentially hampering attempts to solve a greater challenge – raising the U.S. debt limit ceiling – were also playing on investors' nerves. This must be agreed upon before October 17 if the U.S. is to avoid defaulting on its debts, with fears also surfacing of another credit downgrade last experienced in 2011.
The short end of the Treasury curve has seen the greatest movement. The yield on the one-month Treasury-bill reached 0.17 percent on Thursday, its highest level since November, climbing from 0.0355 percent on Monday. Meanwhile, three-month bills have risen from 0.0127 percent to 0.0304 percent and 1-year notes have also ticked slightly higher.
Speaking in Washington overnight, Christine Lagarde, managing director of the International Monetary Fund said that a failure to raise the debt ceiling before October 17 could hurt the global economy and warned that U.S. economic growth could drop below 2 percent this year.
Stocks have been relatively sanguine with the S&P 500 trading flat since the start of October. Riskier foreign exchange has managed to hold up fairly well, as have commodities, and the yield on the 10-year benchmark Treasury ticking lower to 2.6155 percent from 2.6554 percent since Monday.
(Read More: Treasury Bond Prices and Yields: CNBC Explains)