(Adds market comment, remarks from regional Fed presidents)
    By Herbert Lash
    NEW YORK, May 21 (Reuters) - Treasury yields slid on Friday
as the market shrugged off a report showing U.S. factory
activity rose in early May to its highest level in more than a
decade and Federal Reserve officials talked about when to
discuss tapering bond purchases.
    Manufacturers are struggling to find raw materials and
labor, a sign of a possible quickening of inflation, fears of
which have spurred recent spikes in bond yields.
    Data firm IHS Markit said its flash U.S. manufacturing PMI
increased to 61.5 in the first half of this month, a reading
that was the highest since the survey was expanded in October
2009 to cover all manufacturing industries.
    The IHS report is the latest news to show the U.S. economy
is roaring at the "highest" level or "largest" advance in some
time, suggesting inflation is picking up more than the Fed would
likely acknowledge, said Kevin Flanagan, head of fixed income
strategy at WisdomTree.
    "Does this (report) fall into 'maybe inflation is not going
to be as transitory as the Fed thinks?' I would say 'Yes,'"
Flanagan said.
    The yield on 10-year Treasury notes was down 0.9
basis point to 1.625%, well off a more than one-year high of
1.776% reached in late March. 
    Minutes from the April meeting of Fed policymakers released
on Wednesday revealed a contingent within the U.S. central bank
that feels a discussion may start sooner than expected about
pulling back its accommodative monetary policy, Flanagan said.
    The Fed should start talking about the best way to reduce
its asset purchases "sooner rather than later," Philadelphia Fed
President Patrick Harker said on Friday.
    Dallas Fed President Robert Kaplan said hiring difficulties
have continued through May and will likely lead to another weak
jobs report following the lower-than-expected 266,000 positions
added in April.
    Yields on nominal U.S. Treasury debt and inflation-linked
securities fell on Thursday after factory activity in the U.S.
mid-Atlantic region slowed in May from a record pace, casting
doubt on how quickly the economy can continue to grow.
    Supply will move with some rigidity and the bond market
seems to be discounting that, while record surges in commodity
prices, including lumber, are not sustainable, said Joe
LaVorgna, chief economist of the Americas at Natixis. 
    "The bond market is telling you that it's looking past the
recent increase in inflation," LaVorgna said. "When you have
high prices, either people substitute away from those prices or
it brings new producers into the market."
    The yield on the 30-year Treasury bond fell 1.2
basis points to 2.329%. 
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) edged up to
2.616%, after closing at 2.599% on Thursday, off its highest
close in just over a decade of 2.752% that was reached earlier
this week.
    The 10-year TIPS breakeven rate yielded 
2.447%, indicating the market sees inflation averaging just
under 2.5% a year for the next decade.

 May 21 Friday 2:15PM New York / 1815 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.005        0.0051    -0.003
 Six-month bills               0.02         0.0203    0.000
 Two-year note                 99-240/256   0.1574    0.006
 Three-year note               99-194/256   0.3319    0.008
 Five-year note                99-164/256   0.8245    0.010
 Seven-year note               99-202/256   1.2818    0.001
 10-year note                  100          1.625     -0.009
 20-year bond                  100-44/256   2.2392    -0.015
 30-year bond                  100-252/256  2.3292    -0.012
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 GooU.S. 2-year dollar swap      9.25        -0.50    
 spread                                               
 U.S. 3-year dollar swap        11.75         0.00    
 spread                                               
 U.S. 5-year dollar swap         8.50        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -3.00         0.00    
 spread                                               
 U.S. 30-year dollar swap      -30.00         0.00    
 spread (Reporting by Herbert Lash; Editing by Dan Grebler and Jonathan
Oatis)
  



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