PIMCO Client Letter

7 August 2011

Dear Valued PIMCO Client:

As you know, S&P announced Friday evening that it was downgrading the US sovereign credit rating from AAA to AA+, and it assigned a negative outlook to this new rating. This once- unthinkable step has naturally raised many questions among our client base – including: what has happened so far; what is PIMCO planning to do; and what, if anything, do I need to do?

Our client facing colleagues will be reaching out individually to many of you. In the meantime, we are taking the liberty of sharing some general observations.

Naturally, S&P’s unprecedented step has triggered immense debate, interest and concern. The markets that were open this weekend, including Israel, have been choppy and nervous – coming after a couple of weeks in which investors digested unsettling information about the US debt ceiling debate, the European debt crisis, and data pointing to a synchronized global slowing.

Looking forward, we anticipate markets to be both volatile and, at instances, lacking normal liquidity. Given that we are in unchartered waters, it is of course difficult to be both precise and accurate about movements in specific markets. Sentiment will also be impacted by what is taking place in Europe, and by what we expect to be a series of
further US downgrade announcements, as S&P turns its attention to issuers who rely on US Government support for their ratings.

These are markets where you do not want to be forced to transact unless there is a changed view of fundamentals or emergency liquidity needs to be raised. Instead, the key is to have the ability to react to exceptional pportunities.

As you know, PIMCO has not, and does not rely on the rating agencies for its due diligence work. We maintain our own rating methodology based on our analysis, but also planned for the potential of a downgrade by one or more of the ratings services. As such, the S&P action does not involve a major change to our investment positioning.

Needless to say, PIMCO's plan is to continue to diligently watch both fundamentals and technicals and, as always, be well-guided by your investment objectives. Consistent with these, we look to protect your principal and seek attractive return opportunities that may present themselves. Our Portfolio Managers, some of whom are on the trade floor this weekend, are working diligently to meet your investment objectives – managing risk and generating returns.

Where agencies’ ratings do play an important role at PIMCO is in the specification of investment guidelines. This brings us to the final question.

Of course, much depends on each client’s individual circumstances. For most of you, Friday’s S&P downgrade to AA+ does not impact the guidelines that control the investment discretion. For instance, most clients' portfolio quality rules permit both average and individual issuer quality ratings to be below AA+ or may defer to the higher of the major ratings services (both Moody’s and Fitch affirmed the US’ AAA rating on 8/2 following the debt deal being signed into law).

There are some cases, however, where the investment guidelines do not anticipate a downgrade of US Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines, consistent with your investment objective.

Over the weekend, our colleagues in compliance, risk and technology have worked hard to recode all our systems to reflect the S&P downgrade. In the process they have rechecked any guideline issues that could impact either existing holdings or potential strategies in your portfolio. Accordingly, your Account Managers will be contacting you shortly in the event there are any questions about your guidelines. They have also been preparing material to keep you fully informed.

In closing, while the ratings change is a newsworthy event that will be with us for years to come, let us hope that the "silver lining" is greater attention to a longer term solution that will put the United States back on a path to economic prosperity. Please rest assured that, irrespective of what happens in Washington (and Europe!), we will do our utmost to continue to deliver to you the investment management quality that has been associated with PIMCO for over 40 years.

Thank you.

With our best personal regards,

Bill Gross, Co-Chief Investment Officer

Mohamed A. El-Erian, Co-Chief Investment Officer and Chief Executive Officer