(Adds Moody's downgrade, comments; updates yields)

By Tatiana Bautzer

NEW YORK, May 16 (Reuters) -

U.S. Treasury yields rose late on Friday after being down

for most of the session, after ratings agency Moody's downgraded

the U.S. government rating from AAA to AA1, saying the fiscal

performance is likely to deteriorate.

Yields on U.S. 2-year Treasuries accelerated

a rise after the downgrade, and were up 2 basis points (bps)

late on Friday at 3.993%. They climbed to a session peak of

4.012%.

Yields on benchmark 10-year notes meanwhile,

reversed the earlier drop and rose as high as 4.499%.

Moody's on Friday

downgraded the credit rating

of the United States by a notch to "Aa1" from "Aaa", citing

rising debt and interest "that are significantly higher than

similarly rated sovereigns."

Tom di Galoma, managing director at Minschler Financial,

said the Moody's move was surprising.

"I think that is highlighting the problems on the budget

talks in Congress, the bill failed to pass today in the House

committee," he added.

On Friday, the bill

failed to pass a vote

in the House Budget Committee despite President Donald

Trump's call for unity among Republicans.