NEW YORK, July 19 Reuters Top U.S. asset manager Vanguard favors highrated corporate debt over riskier highyield companies39; bonds as it seeks protection against the possibility a sharperthananticipated U.S. economic downturn caused by high borrowing costs, it said in a report.

After one year since the Federal Reserve last raised interest rates, investors largely expect the U.S. central bank to finally start cutting rates as soon as September as inflation is cooling and the labor market is showing signs of weakness.

Vanguard, which manages over 9 trillion in assets, expects the Fed to keep rates on hold for most or all of this year due to continued economic resilience, but is cautious about the prospects of highyield bonds, for which it plans to keep a lowerthanaverage allocation over the next few months.

We are approaching a turning point in the economic cycle, the Vanguard active fixed income team said in a thirdquarter outlook report seen by Reuters. The risk we worry about is the potential for 39;higher for longer39; to become 39;higher until something breaks39;.

Investment grade corporate bonds have seen hefty demand this year as investors searched for higher yields than those provided by safer government bonds. That has compressed investment grade credit spreads, a measure of the premium demanded by bond buyers of corporate debt over government paper.

As of Thursday, spreads stood at 93 basis points, according to the ICE BofA US Corporate Index, down from…