Bill Gross, the founder and co-chief investment officer of PIMCO, warned investors about the perils of the Federal Reserve’s massive monetary stimulus in his January investment outlook entitled “Money for Nothing, Writing Checks For Free.” This is not the first time that Gross is criticizing the Federal Reserve’s purchases of Treasuries and agency mortgage bonds. He has done it several times in his past letters to investors.

“The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold,” Gross wrote in his January letter to investors.

Gross referred to a speech by Federal Reserve Chairman Ben Bernanke. In the speech Ben talked about the United State’s ability to print unlimited money “at essentially no cost.” According to Gross, Bernanke along with his partners in Japan and Europe, accept them as a trade-off for economic growth. Here is what Gross has to say about this, “When central banks enter the cave of quantitative easing and “essentially costless” electronic printing of money, there may be dragons.”

Those inflationary dragons are expected to stay there for another year. So, Gross assumes that bond holders are going to enjoy some breathing space in this year. Despite the fact that several market experts and politicians criticized Fed’s policies in 2012, bonds’ performance in the last year was quite satisfactory.  According to Barclays, U.S. investment-grade corporate bonds returned 9 percent, Junk bonds returned about 15 percent, and U.S. government bonds returned 2 percent in 2012. There was also 10 percent increase in the ETF that tracks PIMCO Total Return (ticker Bond), when compared to 2011.

However, Gross believes this favorable condition for bond investors may not last for long. “While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies,” says Gross.