By Nick Godt

Signals from the corporate bond market have improved in April. But they still contradict the rosy outlook for the U.S. economy and businesses implied in the big rally in stocks that began in early March.

The good news: Corporate spreads, which rise when investors jump into the safety of government bonds amid fear that companies are more at risk of going bankrupt, have actually fallen in April.

The bad news: They still remain abnormally high, signaling bond investors remain wary of the prospects for the economy and corporations. And that's also a bad omen for stocks.

"While equity investors are painting the town red, corporate bond traders are the market's 'designated drivers'," said Jack Ablin, chief investment officer at Harris Private Bank.

Spreads only improved a bit in April while the stock market roared through its rally.

"Do bond investors know something equity investors don't? Probably," Ablin says. "History has shown whenever bond and stock investors have conflicting views, bond investors usually win."

Part of the answer might actually be revealed in early May, when the U.S. government will release the results of its so-called "stress tests" of 19 major banks, aimed at measuring their ability to weather a worsening of the economic recession without going belly up.

Research from Harris Trust used BBB corporate bonds, which include those of financial firms. Those spreads have not improved since November, even as those of junk bonds -- or highly risky debt -- have shown a marked increase.

"Bond investors are cautious on financials and for good reason," Ablin said.

On Friday, stocks rallied past the Federal Reserve releasing the methodology it used to apply the stress tests. with the Dow Jones Industrial Average (DJI) up 135 points, or 1.7%, at 8,092. The S&P 500 index (SPX) gained 15 points, or 1.8%, to 867, while the Nasdaq Composite (RIXF) advanced 41 points, or 2.5%, to 1,693.

The stock market, as measured by the broad S&P 500 index, has rallied nearly 30% since hitting 12-year lows in early March.

During the same period, corporate spreads have fallen 13%, with most of the decline taking place during April, according to the Merrill Lynch U.S. Corporate Bond Master Index.

Signs that the economy has stopped deteriorating as fast as before, and hopes for a recovery of the financial sector have helped boost the prospects for U.S. firms.

Anecdotally, shipping and delivery giant UPS (UPS), often used as an economic bellwether, saw its bond spreads tighten even after it posted worse-than-expected first quarter results on Thursday.

But overall bond spreads still remain about five times as elevated as their historical average since the 1970s, according to James Sarni, senior managing partner at Payden & Rygel.

"Things are not getting worse but they're not improving as fast as the stock market is," Ablin of Harris Trust said. "But if [corporate] bonds continue to tread water here, stocks won't be able to go anywhere."