* Asian shares flat, Nikkei bounces back
* U.S yield curve inversion raises fears of U.S. recession
* Futures price in Fed rate cut this year
* Asian stock markets: tmsnrt.rs/2zpUAr4
By Hideyuki Sano
TOKYO, March 26 (Reuters) - Asian shares were shaky on Tuesday after U.S. Treasury yields sank to their lowest since late 2017, further below short-term interest rates and adding to fears of a U.S. recession.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat in early trade after two days of losses. Japan's Nikkei rebounded 1.1 percent after a 3.0 percent fall on Monday.
Wall Street shares were little changed on Monday with the S&P 500 ending with a small loss of 0.08 percent.
Investors have been spooked by sharp falls in U.S. bond yields and an inversion of the U.S. Treasury yield curve, which is widely seen as an indicator of an economic recession.
The 10-year U.S. Treasury yield dropped to 2.405 percent , having shed 5 basis points on Monday.
It has fallen more than 20 basis points since the Fed last week ditched projections for raising rates this year and announced the end of its balance sheet reduction, citing signs of an economic slowdown.
The 10-year yield fell below the yield for three-month bills on Friday for the first time since 2007, inverting the yield curve.
San Francisco Fed researchers have said that the difference in those two maturities was the most useful for forecasting a recession.
"I think the market has overreacted to the yield curve inversion because the San Francisco Fed has said it is the most reliable indicator," said Hiroshi Nakamura, senior manager of investment planning at Mitsui Life.
"I expect some correction to the latest rally in bonds. For now we have to see this week's auctions," he said.
The Treasury Department will sell $113 billion in coupon-bearing supply this week, including $40 billion in two-year notes on Tuesday, $41 billion in five-year notes on Wednesday and $32 billion in seven-year notes on Thursday.
Investors will also be watching Fed policymakers scheduled to speak later on Tuesday.
Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80 percent chance of a move priced in by September.
In the currency market, the fall in U.S. yields undermined the dollar's yield attraction.
The euro stood at $1.1316, having gained a tad on Monday after Germany's IFO Institute said its business climate index rose to 99.6, beating a consensus forecast of 98.5 and ending six consecutive months of decline.
The dollar was little changed at 110.04 yen, after having hit a 1 1/2-month low of 109.70 on Monday.
The British pound stood at $1.3211, erasing small gains made after lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May's government for a day.
May said on Monday there was not yet enough support to put her Brexit deal to a third vote in parliament.
Oil prices hovered below their recent four-month peaks, as the prospect of tighter U.S. crude supply was offset by concerns about a slowdown in global economic growth.
U.S. crude futures traded at $59.26 per barrel, up 0.5 percent on day, a tad below Thursday's high of $60.39, its highest since mid-November.
Brent futures were up 0.3 percent at $67.42 a barrel. (Reporting by Hideyuki Sano; editing by Darren Schuettler)