Just when it looked like stocks were making a bullish turn, a troubling Treasury auction slammed the brakes on the market’s momentum.

The $20 billion 30-year Treasury auction went off at the highest rate since 2007 at 1 p.m. in New York Thursday. Within minutes the S&P 500 Index tumbled, falling as much as 1.2% before regaining its footing. The Cboe Volatility Index, also known as the VIX or Wall Street’s fear index, spiked above 17. And the selloff in the small-cap Russell 2000 Index accelerated, pushing it to it’s lowest close in months.

Stocks had already weathered a hotter-than-expected inflation reading before the market opened Thursday, as the S&P 500 reached session highs at midday. Bulls had powered the index to four straight days of gains, their optimism fueled by a slew of Federal Reserve officials suggesting the central bank may not need to raise rates again this year.

But sentiment reversed after the 30-year Treasury auction, which drew weak demand and weighed heavily on the broader market sentiment. Swap contracts linked to future interest-rate decisions pushed the odds of another quarter-point hike back to about 50%, up from about 30% as recently as Wednesday.

“It’s really starting to sink in that the Fed will keep rates higher for longer,” Yung-Yu Ma, chief investment officer at BMO Wealth Management, said via phone. “Investors are buying the idea that short-term rates have peaked, but investors are in a state of shock and disbelief that longer-term rates continue to rise. If those longer-term rates continue move higher, that will be a source of concern for stocks.”

The Treasury auction was awarded at 4.837%, nearly four basis points higher than its yield in pre-auction trading at the bidding deadline. Demand fell short of dealers’ expectations, despite being the highest-yielding long-bond auction of its kind since 2007.

It also came after a weak 3-year auction on Tuesday and a 10-year auction Wednesday.

“While Treasury auctions really only have an impact on the day of it in terms of market reaction, it’s still a messaging signal on demand,” said Peter Boockvar, chief investment officer at Bleakley Financial Group LLC. “And on that demand, it was pretty soft this week. Treasury yields are at the highs of the day in response.”

Before sentiment turned, equity investors had already shrugged off a consumer price index report that topped expectations. Traders instead focused on the core annual inflation rate, which rose 4.1% in September, the slowest pace in two years.

If Thursday’s drop in the S&P 500 holds, it would snap a four-day winning streak — the longest since August — that came after a number of Fed officials said the rout in bond markets may cancel out the need to raise rates again. The message was reiterated on Wednesday, when Fed Governor Christopher Waller said the central bank can watch and see what happens before taking further action.

The yield on 10-year Treasuries rose above 4.7% on Thursday, reversing a two-day decline. The tech-heavy Nasdaq 100 Index had the least bad session, falling 0.4%. Futures on the gauge as well as those on the S&P 500 were up 0.1% in early Asia trading on Friday.

“The market is currently being moved almost solely by the bond market,” said Jay Hatfield, chief executive and founder of Infrastructure Capital Management. “That will change tomorrow as we head into earnings season.”

(Updates with mention of futures’ trading in Asia in the second-last paragraph.)

Author: Elena Popina, Jessica Menton and Alexandra Semenova