Despite the perception that most emerging market countries are riddled with debt and plagued by leadership that’s incompetent at best and corrupt at worst, on the whole the debt levels of most emerging countries are low.

According to statistics compiled by the International Monetary Fund last November, emerging market debt as a percentage of GDP is expected to reach only 39.6 percent this year. By contrast, that measure will reach 93.6 percent in the US this year, up from 61.9 percent in 2007.

As you can see from the graph below, that measure is expected to become even more favorable in the years to come as developing economy debt will account for less than 33 percent of GDP while soaring to almost 110 percent of developed economies’ GDP.

So while our positions in SPDR Gold Trust (NYSE: GLD) and iShares Barclays 3-7 Year Treasury Bond (NYSE: IEI) have run on safe-haven buying, generating returns of 10.9 percent and 2.6 percent respectively, a strong argument can be made that emerging market debt is a true safe haven from a fiscal policy perspective.

Debt levels are low, most currencies are undervalued, foreign exchange reserves are high as demonstrated by the growth of sovereign wealth funds, and banking systems are healthy. Growth in developing economies is also increasingly being driven by surging domestic consumer demand rather than the export model that used be the dominate driver of growth.

Arguably, emerging market debt may be the safest in the world at the moment, particularly if our reading of the global economy turns out to be incorrect and we enter a double dip recession.

While our addition of iShares JP Morgan USD Emerging Market Bond Fund (NYSE: EMB) was largely driven by our view that debt issued by the Russian Federation – which accounts for the largest chunk of the fund’s assets at 9.1 percent – is undervalued, the fund is also an excellent hedge against further economic weakness and a turn in the US dollar.

In fact, despite being hedged against local currencies by investing in only dollar-denominated bonds, iShares JP Morgan USD Emerging Market Bond Fund shows an almost perfect inverse correlation to shifts in the US dollar, with our small 2.7 percent loss in fund almost mirroring the 2.6 percent gain in iShares Barclays 3-7 Year Treasury Bond.

Emerging market bonds may be the one position in our Income & Hedges Portfolio that isn’t in the green, but it’s a key component in our overall strategy of managing the portfolio with an eye towards total return. When hedging a portfolio against the possibility of future downside, every position won’t always be a money maker, but the cushion will be very valuable if the markets turn.

All of our positions in the Income & Hedges Portfolio remain buys at our listed prices.