European equity markets have kicked off the second quarter with marginal gains this morning.
Last night, Wall Street and Europe closed off the first loss-making quarter since the onset of the Covid-19 pandemic in early 2020.
Stocks did stage a recovery towards the end of the latest quarter with the S&P 500 index up 11% in the last 12 days of the quarter.
However, the market in bonds is signalling troubled times ahead.
"There is an absolute meltdown in global bonds," Paul Sommerville of Sommerville Advisory Markets told Morning Ireland.
He explained that one index had fallen 11% from its high last year in what was the worst selloff since the financial crisis.
"Bond prices fall when interest rates rise. The market is perceiving that the Fed will have to hike rates at least nine times in 2022 and they think the ECB will raise rates too," he said.
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More concerning is a phenomenon called the 'yield curve inversion' - where interest rates on short-term debt exceed long-term rates - the occurrence of which is interpreted as heralding a recession.
"The bond market believes a recession is coming in 2023," Paul Sommerville explained.
"Every recession since 1955 in the US has been preceded by a yield curve inversion and that's happening in the bond market. It's saying there's trouble ahead in 2022 and 2023."
Richard Hunter, Head of Markets with Interactive Investor, said the diverging outlook of bond and stock market investors had been prompted by the threat of over-tightening by the US Federal Reserve.
"Equity investors are expecting the Fed to engineer a soft landing, with the economy showing real signs of strength and with the more recent market dips providing some buying opportunities on valuation grounds," he said.
The next event on the horizon for markets is the release of the US non-farm payrolls later in the day.
"Of equal significance will be the unemployment rate, which has latterly implied tightness in a labour market approaching full employment," Mr Hunter said.
"While this effectively frees up the Fed to concentrate on inflation, the tightness could also lead to wage rises which would be further inflationary factors of their own," he added.
