Rising rates crush long-duration equity valuations

What happened: The yield on two-year Treasury notes surged to a 16-month high of 4.16% after the May payrolls report doubled consensus at 172,000. This spike triggered a significant sell-off in long-duration equities, with the Invesco WilderHill Clean Energy ETF (PBW) crashing 11%, Enphase Energy (ENPH) sinking 18%, and First Solar (FSLR) dropping 11%. Despite a 34% year-to-date gain, PBW's performance masked a brutal five-year pattern of crashes during every rate cycle. Meanwhile, Bank of America strategist Michael Hartnett warned that investors remain heavily committed to risk assets despite long-dated bond yields reaching 5%, suggesting a potential market vulnerability.

Market impact: The rising rates narrative is driving a repricing of long-duration equity valuations, particularly in sectors like clean energy where companies are cash-flow negative. These companies are sensitive to higher discount rates, which make their future cash flows less valuable today. The S&P 500, up roughly 8% year-to-date, could face pressure as inflation and potentially higher rates challenge sky-high equity valuations.

What to watch next: Investors should closely monitor the June jobs report, due on July 8, for any further surprises in employment data that could drive Treasury yields and equity markets. Additionally, the upcoming earnings season, starting late July, will provide insight into how companies are navigating the rising rate environment and its impact on their cash flows and growth prospects.