NEW YORK (Reuters) -Top U.S. asset manager Vanguard is bullish on corporate bonds despite high valuations, and while it expects tariffs will continue to be a risk for the U.S. economic and inflation outlook, those headwinds could be offset by further Federal Reserve interest rate cuts.

Investment-grade credit spreads - or the premium over U.S. Treasuries paid by high-rated companies to issue bonds in the U.S. market - declined to 74 basis points last week, their lowest since 1998, as investors pile into the asset class to grab higher yields than U.S. Treasuries, and as a Fed in rate-cutting mode is expected to encourage economic activity by lowering borrowing costs for U.S. firms. 

"Credit spreads are near historical lows, but healthy fundamentals, attractive all-in yields, robust investor demand, a proactive Fed, and low recession risk support current valuations," Sara Devereux, global head of fixed income at Vanguard, said in a note to clients on Monday, seen by Reuters. She added the firm has been adding credit risk across its portfolios.

"Credit valuations are stretched but justified," she said.

Vanguard, which manages $11 trillion, estimated that about a third of the impact of President Donald Trump's tariffs has already passed through the economy, with half expected by year end and the rest in 2026.

"A slow pace of implementation has helped the economy digest the changes and companies mitigate the impact, but risks to growth and inflation persist," Devereux said. 

The Fed lowered interest rates by 25 basis points last week to a 4%-4.25% range, and traders are betting additional rate cuts this and next year will bring interest rates to about 3% by the end of 2026.

Further rate adjustments, as well as Trump's policies that include tax cuts and deregulation, will likely offset the impact of tariffs on U.S. growth, said Devereux, adding she expects moderate growth over the next year.

However, she warned, the Fed is unlikely to cut rates by as much as the market is expecting, unless the economy enters a recession.