Traders said a Western bank had floated a power spread note seen as taking advantage of the recent widening in bond-swap spreads and bought into 10-year treasury bonds for hedging.

"Foreign players bought a lot despite a pullback in treasury futures," said a local brokerage's bond trader. "Given the view on the won is not negative, the recent widening in bond-swap spreads could be enough to trigger arbitrage trade."

Citing unnamed market sources, Yonhap Infomax news reported that a foreign bank, identified only as H, had sold 10-year power spread notes for 10 billion won and also made IRS pay orders.

When contacted by Reuters, HSBC declined to comment.

Ten-years Treasury bond edged down one basis point to 4.23 percent, with the three-year treasury yield adding one bp to 3.68 percent.

Interest rate swap rates were steady to slightly lower, led by longer-dated notes.

"Restructured bond such as the sale of the long-term power spread note gave impetus to IRS paying," a swap trader said.

The won retreated from a seven-week high against the dollar.

It closed local trade at 1,076.9 per dollar, versus Wednesday's local finish at 1,073.9 on the dollar's global strength after the US Federal Reserve offered no hint of further monetary support.

But trade remained in a tight band ahead of a meeting of European leaders to help Greece avoid a debt default, and dealers forecast the dollar/won pair to stay in the 1,070-1,080 range for a while.

On Friday morning, the Bank of Korea is set to release June consumer sentiment and inflation expectations indexes.

Copyright Reuters, 2011