Oct. 2 (Bloomberg) -- The biggest disruption in corporate bonds in three decades is turning into a gift for Jefferies Group Inc. and Mesirow Financial Inc.

Jefferies, a New York-based brokerage that specializes in mid-sized companies, and Mesirow, a so-called regional dealer based in Chicago, haven't incurred the mortgage-related writedowns causing bigger rivals to collapse. They are signing up veterans of Bear Stearns Cos. such as Dominick Mondi, who was named the broker's top salesman more than 20 times, to trade more of the $16.5 trillion market for corporate, mortgage and municipal debt. Other hires are coming from firms including Morgan Stanley.

``I've never seen anything like this,'' said Mesirow Chief Executive Officer James Tyree, 50. ``This is one of the times in history where you can attract dozens'' of new hires.

The companies see potential profit in the widening gap between sellers' asking prices for securities and what buyers wish to pay. The so-called bid-ask spread on Dallas-based AT&T Inc.'s $600 million of 6.8 percent bonds due in 2036 averaged 121 basis points last week, up from 7 basis points in early 2007, according to data compiled by Bloomberg.

Mesirow, a 71-year-old firm owned by employees, added 15 bankers, traders and salespeople this year to its fixed-income unit, Tyree said. Jefferies said it boosted the bond staff by 30 percent to more than 150. That compares with 130,000 layoffs at the world's biggest banks and brokers.

Declining Volumes

With larger firms committing less capital to making bets, corporate-bond trading volume has decreased about 40 percent to $16 billion a day this year versus the same period in 2007, Federal Reserve data on primary dealers show.

This loss of liquidity has driven a wedge between bids and offers, allowing traders to collect higher fees, said Kumar Venkataraman, 35, an associate finance professor at Southern Methodist University's Cox School of Business in Dallas. He wrote a study on bid-ask bond spreads in 2006.

The gap on about 1,000 investment-grade bonds averaged 32 basis points last week, excluding about 600 securities with spreads of 100 basis points or more, according to composite pricing data compiled by Bloomberg. That amounts to about $24 in commission per $1,000 bond.

The difference was about 7 basis points, or $5, for investment-grade bonds before regulators created Trace in 2002. The Financial Industry Regulatory Authority computer system disseminates prices to anyone with Internet access. The gap narrowed to about 4 basis points, or $3, immediately after, according to Venkataraman's study, published in the Journal of Financial Economics. A basis point is 0.01 percentage point.

Kraft, Deere

The 6.125 percent notes due in 2018 issued by Northfield, Illinois-based Kraft Foods Inc. traded with an average bid-ask gap of 57 basis points last week. It was about 10 basis points three months ago.

On Moline, Illinois-based Deere & Co.'s 5.5 percent notes due 2017, the spread averaged 59 basis points last week, Bloomberg data show. It was 6 basis points when the world's largest maker of tractors issued the securities in April 2007.

Larger gaps may not translate into higher profits for dealers because fewer bonds are trading, said Venkataraman. They also reflect how it's becoming harder for dealers to find buyers amid weaker demand. Investment-grade corporate bonds fell 7.3 percent in September, their worst month since 1980.

``While spreads are wider, volatility is also very high and liquidity capital is at a premium,'' Venkataraman said.

More Transparency

Corporate bond traders have been required since July 2002 to report sales to Trace. The transparency had hastened the decline of one of Wall Street's oldest professions, a moneymaker since bonds financed the expansion of railroads in the 1800s.

Trace cost traders $1 billion in commissions in its first year and reduced bid margins by 20 percent, according to Venkataraman. About a quarter of all corporate-bond traders, analysts, brokers and salesmen lost their jobs in the next few years, according to Options Group, an executive-search and consulting firm in New York.

Now that per-trade profits are rising, smaller firms are able to take advantage of a Wall Street pullback and sign on veterans with decades of experience.

``The regional model was thought to be dead,'' said Andrew Feltus, who oversees $8 billion in high-yield debt as senior vice president and portfolio manager at Pioneer Investment Management Inc. in Boston. ``That's not true now.''

Merrill Lynch & Co. of New York posted $52.2 billion of writedowns and credit losses on assets tied to deteriorating subprime mortgages. It was sold last month to Charlotte, North Carolina-based Bank of America Corp. Morgan Stanley reported $15.7 billion of writedowns and losses. Bear Stearns collapsed in March and was purchased by JPMorgan Chase & Co. of New York.

Mesirow Grows

Mesirow expanded the corporate bond sales staff by at least three this year and built up its municipal trading team. The firm hired Mondi, 54, a 28-year veteran of Bear Stearns, in June. He added almost 10 traders and salespeople to the municipal team, which had only a few a year ago.

``It's probably the best opportunity in the business there's ever been,'' said Randy Wolfe, 45, senior managing director of fixed income at Mesirow.

The firm's revenue rose 43 percent to $156 million in the quarter ended June 30 from a year earlier, according to the company. Merrill's plunged 74 percent to $6.1 billion.

Mesirow has more than 1,100 employees in the U.S. and U.K.

Jefferies, the second-best performer in the AMEX Securities Broker/Dealer Index this year with a 7.25 percent decline, boosted the fixed-income staff in part by adding more than 20 mortgage-backed securities traders. The shares fell 91 cents, or 4.1 percent, to $21.38 in New York Stock Exchange composite trading.

Mortgage-Backed Expansion

While the firm's second-quarter revenue of $584 million was down 24 percent from a year earlier, sales from the unit comprising fixed-income and commodities trading and high-yield underwriting rose 36 percent. Jefferies spokesman Tom Tarrant declined to comment

CastleOak Securities LP, a minority-owned firm in New York, hired three mortgage-backed salespeople as trading profit surged 150 percent this year. It may add five or six more in the next 12 months, said Patrick DeCatalogne, 42, head of fixed-income sales and trading.

The firm specializes in ``riskless'' trades between institutional investors, in which it acts only as a dealer and doesn't maintain inventories of debt, DeCatalogne said.

``All of a sudden I've become as competitive as Goldman, as Citi, as Bank of America,'' he said. In a couple of years, ``that window will close and all that spread will be taken out of the game again.''

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: October 2, 2008 18:55 EDT