If interest rates are rising, which type of rate do debt investors generally prefer?

When interest rates are rising, debt investors typically prefer floating rates. This preference is rooted in the nature of floating rate debt instruments, which have interest payments that are adjusted periodically based on a reference interest rate, such as LIBOR or SOFR. As the market interest rates increase, the payment that the issuer makes on the bond also increases. This can help investors maintain or enhance their yield, making them less susceptible to the adverse effects of rising rates compared to fixed-rate debt instruments.

Investors in fixed rates usually lock themselves into a fixed interest payment, which could become less attractive compared to new debt issued at higher rates as market rates rise, leading to potential value depreciation of existing fixed-rate bonds.

While variable and discounted rates might sound similar, they do not precisely capture the essence of floating rates in the context of rising interest rates. Thus, floating rates are particularly appealing in a rising interest rate environment, as they offer the potential for increased returns that adjust with the market.