(Recasts, adds TIPS and analyst and Fed comments) By Karen Pierog CHICAGO, May 5 (Reuters) - U.S. Treasury yields drifted lower on Wednesday as inflation expectations leaped to multi-year highs even as Federal Reserve officials downplayed the risk of a big and sustained rise in inflation. The breakeven rate on 10-year Treasury Inflation-Protected Securities (TIPS) topped 2.47%, its highest level since April 2013, indicating the markets sees inflation averaging closer to 2.5% a year for the next decade. For five-year TIPS, the breakeven inflation rate hit 2.695%, its highest since April 2011. Ben Jeffery, a strategist at BMO Capital Markets in New York, attributed the spikes "to signs that some of the pockets of inflation that we"re seeing are starting flow through to costs being paid in the service sector." Data from the Institute for Supply Management on Wednesday showed prices paid by services industries rose to 76.8, the highest reading since July 2008, from 74.0 in March. The move higher in breakeven rates came as Fed officials tried to allay fears of runaway inflation as the economy recovers from the coronavirus pandemic. "Despite the ebbs and flows of the data, inflation is expected to remain close to 2 percent over the forecast horizon," Boston Federal Reserve Bank President Eric Rosengren said. "This does seem to me to be the most likely outcome, which should allow monetary policymakers to be patient in removing accommodation." Meanwhile, Treasury yields were slightly lower as the market positioned for Friday"s release of April employment numbers, according to Jeffery. The benchmark 10-year yield was last down 1 basis point at 1.5819%, holding below a 14-month high of 1.776% reached on March 30. Tony Rodriguez, head of fixed income strategy at Nuveen, pointed to the potential that job gains well above or below expectations could move the range-bound Treasury market. "I think it would have to be closer to 1.2 million (in job gains) to have the market really feel like growth is accelerating at a pace that"s a little above what people expected coming into this," he said. Economists polled by Reuters expect that 978,000 jobs were added in April. Ahead of the U.S. Labor Department report, the ADP National Employment Report on Wednesday showed private payrolls rose by 742,000 jobs last month. Data for March was revised higher to show 565,000 jobs added instead of the initially reported 517,000. Economists polled by Reuters had forecast private payrolls would increase by 800,000 jobs in April. In its quarterly refunding announcement, the Treasury Department said it will keep its issuance of notes and bonds steady, with sales of $58 billion of three-year notes, $41 billion of 10-year notes, and $27 billion of 30-year bonds scheduled for next week. It added that it may take certain extraordinary measures if Congress does not raise or suspend the U.S. debt limit in a timely manner and that it expects to have a cash balance of around $450 billion when the debt limit suspension expires on July 31. Rodriguez said while there should be solid demand for the upcoming auctions, they will test investor appetite given that a poor auction of 7-year notes earlier this year led to market volatility. The two-year Treasury yield, which typically moves in step with interest rate expectations, was last less than a basis point lower at 0.1546%. A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was little changed at 142.37 basis points. May 5 Wednesday 3:40PM New York / 1940 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0175 0.0177 0.003 Six-month bills 0.04 0.0406 0.000 Two-year note 99-241/256 0.1546 -0.007 Three-year note 100-50/256 0.3083 -0.011 Five-year note 99-192/256 0.8013 -0.019 Seven-year note 99-248/256 1.2547 -0.018 10-year note 95-224/256 1.5819 -0.010 20-year bond 95-180/256 2.1426 -0.007 30-year bond 91-204/256 2.2546 -0.011 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 11.50 0.25 spread U.S. 3-year dollar swap 14.25 0.25 spread U.S. 5-year dollar swap 10.00 0.50 spread U.S. 10-year dollar swap -1.00 -0.25 spread U.S. 30-year dollar swap -26.75 -0.25 spread (By Karen Pierog; Editing by Kirsten Donovan and Chizu Nomiyama) Our Standards: The Thomson Reuters Trust Principles.