May 21 (Reuters) - Longer-dated Treasury yields rose on

Wednesday as investors continued to watch progress of a tax bill

in U.S. Congress and before the Treasury Department will auction

20-year bonds.

A deteriorating fiscal outlook has taken focus this week

after Moody's Investors Service on Friday cut the United States'

sovereign credit rating from the top "Aaa."

Yields at the longer end of the Treasury curve have been

rising steadily this month, driven by domestic fiscal concerns

and also worries that President Donald Trump's erratic economic

policies will not only stoke inflationary pressures but also

erode the appeal of U.S. assets. This week, yields in Japan and

the euro zone, too, have risen.

Some investors are concerned that the tax and spending bill

has fewer spending cuts than previously hoped.

The bill faces a critical stress test on Wednesday as

Republicans in the U.S. House of Representatives try to overcome

internal divisions about cuts to the Medicaid health program and

tax breaks in high-cost coastal states.

Longer-dated yield increases have been due to "a combination

concern over inflation and fiscal" issues, with easier tax

policies being a newer factor in recent days, said Stephen Gola,

head of U.S. Treasuries Sales & Trading at StoneX Group.

Gola notes that hedge funds have been putting on steepener

trades, or bets that longer-dated yields will rise relative to

shorter-dated ones, which could be having an outsized impact on

market moves.

Foreign demand for a $16 billion sale of 20-year bonds will

be a focus on Wednesday as investors watch for any signs that

the worsening U.S. fiscal picture or the erratic implementation

of President Donald Trump's trade policies are denting foreign

investment in the United States.

Gola doesn't anticipate any large demand issues with

Wednesday's 20-year auction, noting that large tails are rare.

The bond auction is also a new issue, which typically see more

demand than reopenings.

Analysts at JPMorgan noted in a report on Tuesday that

foreign participation at April's 20-year auction held steady at

8% even as demand from end-users declined on the month.

Still, "given still elevated policy uncertainty amid a

worsening fiscal outlook," yields at the auction be higher than

the market is pricing heading into the sale, they said.

The Treasury will also sell $18 billion in 10-year Treasury

Inflation-Protected Securities on Thursday.

The 20-year bond yield was last up 5.3 basis

points on the day at 5.0428%.

The 2-year note yield, which typically moves in

step with interest rate expectations, rose 3.7 basis points to

4.007%.

The yield on benchmark U.S. 10-year notes rose 5

basis points to 4.531%.

The yield curve between 2-year and 10-year notes

steepened by around 1 basis point to 53 basis

points.

The 30-year bond yield rose 4.4 basis points to

5.0112% from 4.967% late on Tuesday.