Bill Gross, manager of the world's largest bond fund at Pimco, said Thursday that bond portfolios should tread water this year, despite a rough 2013 that produced the worst annual loss in Gross' fund in nearly two decades.
"Total return bond portfolios should float above water in 2014," Gross said in his monthly letter to investors titled "Seesaw Rider.'' Gross's flagship Pimco Total Return Fund has $237 billion in assets.
Gross reiterated that investors should focus on short-dated bonds. He also said that the personal consumption expenditures (PCE) annualized inflation rate will be more critical to analyzing Federal Reserve policy in 2014 than the unemployment rate.
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"Watch PCE inflation more than the unemployment rate."
The Commerce Department releases the PCE price index monthly together with its personal income and spending data.
The PCE price index is the Federal Reserve's preferred gauge of price pressures facing consumers.
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Gross said that, given the Fed's target of 2 percent inflation and December's annualized inflation rate of just 1.2 percent, investors can expect the key federal funds rate to remain low until at least 2016.
Gross' fund fell nearly 2 percent last year, marking its worst performance since 1994 and its first annual loss since 1999, according to data from Morningstar.
The performance beat just 40 percent of peers, and led investors to pull a record $41.1 billion from the fund for the year, Morningstar data showed.
Pacific Investment Management Co., a unit of European financial services company Allianz SE, had $1.97 trillion in assets as of Sept. 30, 2013, according to the firm's website.