(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) Our Standards: The Thomson Reuters Trust Principles.