Investors are betting the European Central Bank will start raising rates before the end of its quantitative easing.
Forward swaps based on the Euro Overnight Index Average are pricing 10 basis points of rate increase by April next year, compared with less than three at the end of last month.
Investors are also betting the ECB will exit from negative policy rates by January 2020. The ECB may taper its bond purchases further beyond the end of this year as it faces increasing limits on its bond-buying programme.
Following the ECB's policy review on Thursday, President Mario Draghi refused to speculate on the possibility of rate increases before quantitative easing ends.
He did acknowledge, however, that the balance of risks to growth has improved and the ECB’s policy committee discussed removing a reference to rates remaining “at present or lower levels”.
Policy-makers considered the question of whether interest rates could rise before their bond-buying programme comes to an end, according to people familiar with the matter. An ECB spokesman declined to comment.
Mr Draghi has said in the past that the ECB would not raise rates until well past the horizon of its net asset purchases.
German bunds sold off following that report, with the five-year yield rising as much as 8 basis points to -0.30 per cent. The yield curve flattened, with the spread between five- and 30-year notes narrowing by 4 basis points.
Expectations that the ECB will adopt a less accommodative policy stance have been building up in the market following improvement in recent euro-area economic data, including purchasing managers’ indexes hovering near six-year highs.