April non-farm payrolls arrive tonight, bond traders betting tariffs "freeze" US job market.

The non-farm payroll report for April is set to be released tonight, with economists predicting that the report will show an increase of 135,000 jobs, lower than the 228,000 jobs added in March. The day before the report was released, the money market expected the Federal Reserve to cut interest rates by nearly four 25-basis-point cuts in 2025, one more than expected before President Trump announced his large-scale tariff policy last month. Bond investors in the United States are betting that President Donald Trump's tariff policy will drag down the development pace of the world's largest economy and force the Federal Reserve to lower interest rates. At the same time, Wednesday's position data showed that long positions in US short-term government bonds continued to increase. Investors are betting that Trump's large-scale tariff policy will have a bigger impact on economic growth than the inflation it brings. However, economic data continues to challenge expectations of a significant economic slowdown: on Thursday, the results of a manufacturing survey were better than expected, prompting traders to cover some of their rate cut bets. The tense atmosphere in the market has put a spotlight on the April non-farm payroll report, which will provide a preliminary glimpse into the impact of tariff policy uncertainty on the labor market. Lee Hardman, strategist at Mitsubishi UFJ Financial Group (MUFG), said, "Market participants are more concerned about the significant economic slowdown than the short-term inflation risk brought about by tariff adjustments when weighing the impact of tariff policy on Fed decisions." For bond investors, a key question is whether recent surveys reflecting economic pessimism will affect core economic indicators such as employment and consumer spending. In April, US consumer confidence fell to nearly a five-year low, while an index measuring US manufacturing activity experienced its largest contraction in five months. Signs of economic weakness have pushed prices of US short-term government bonds higher this month, steepening the yield curve. In April, the performance of 2-year and 5-year government bonds exceeded that of 30-year government bonds, with the performance difference reaching the highest level since early 2023. Negotiations with major trading partners are ongoing or in the planning stages, and uncertainty remains about how and when tariff policies will be implemented, making the economic outlook more uncertain. Japan says discussions may accelerate in mid-May. Japanese Finance Minister Taro Aso even hinted that Japan may use its large holdings of US Treasury bonds as bargaining chips, but it is unclear how serious he is in his statement. As the largest foreign holder of US Treasury bonds, Japan holds about $1.1 trillion in US Treasury bonds. Importance of Key Data Currently, Federal Reserve officials are waiting for further validation of the "hard data" while being wary of the inflation risks that tariffs could trigger. Fed Governor Christopher Waller said last week that he would support rate cuts if the unemployment rate rose significantly. If Trump reintroduces more aggressive tariff policies and companies begin large-scale layoffs, the unemployment rate could rise. Gargi Chaudhuri, Chief Investment Officer for the Americas at PIMCO, said, "The cooling of the labor market is a necessary condition for the Fed to continue its accommodative policy." She believes that while the soft employment data in April "is a step in that direction," the Fed needs to see more data reflecting a trend of economic weakness. "They have to weigh all the data, and I think just one soft data report is not enough to imply or initiate a rate-cut cycle." Ahead of the Fed meeting on May 6, the Fed is in a quiet period. Traders expect the Fed to make about four 25-basis-point rate cuts in 2025, with the first rate cut possibly in June. In mid-March, the market expected only two rate cuts this year. Michael Cudzil, portfolio manager at PIMCO, said in an interview on Wednesday, "If we see a substantial turn in the economy, then later this year, the Fed is likely to react, and quite aggressively." Cudzil also revealed that PIMCO has been increasing its positions in 5 to 10-year US Treasury bonds. Economists predict that the April US employment report will show an increase of 135,000 jobs, lower than the 228,000 jobs added in March. However, most believe that this data can only reflect the impact of the US tariff increase to a limited extent. Even if the report data is strong, investors may still consider this to be a reflection of the past, continuing to anticipate a wave of layoffs in the coming months. Anna Wong and the Bloomberg Economics team wrote that the April data released on Friday will be the "last reliable data before the storm," and that "signs of worsening in the labor market may be more apparent as early as May." Options trading around the non-farm payroll report - 10-year US Treasury bond straddle options expiring at the close on Friday - currently imply a daily volatility of around 9 basis points in the 10-year bond yield, similar to the volatility seen when non-farm data were released. In the US Treasury futures market, the number of open positions (the total risk taken by traders) has sharply increased since the initial sell-off caused by the tariff policy announcement. The number of open positions in 5-year government bond futures contracts has risen to the highest level since the early 1990s.