Italian covered bonds could face a rough ride should Italy’s referendum go as expected, with bankers foreseeing further widening and downbeat on the prospects of issuance into next year, although the impact on overall immediate European supply prospects are considered less clear.

On Sunday, Italians will vote on a series of reforms to Italy’s constitution that have been pushed by prime minister Matteo Renzi. The majority of commentators and market participants expect voters to reject the reforms, and such a result is seen as having a negative impact on European markets.

“This outcome would really put the cat among the pigeons as far as the future of Renzi and his government is concerned,” said Günther Scheppler, senior covered bond strategist at DZ Bank. “Amidst the ongoing banking crisis in Italy, the risk of political instability triggered by a ‘no’ vote would be highly likely to prompt further spread widening on Italian covered bonds.

“In this scenario, covered bank bonds from Spain and Portugal might also be dragged into the mire once again.”

Covered bonds from all jurisdictions have widened since early November, on the back of Donald Trump’s surprise win and end-of-year profit-taking and drying up of liquidity, mirroring movements in underlying sovereign bonds. Peripheral issuance has been most affected, and Italian spreads have also been under pressure because of concerns over the country’s banking sector. In intermediate to long maturities, Italian spreads widened by around 30bp in November, reaching their widest levels since March.

Michael Spies, covered bond and SSA strategist at Citi, said the correlation between OBG and BTP spreads has increased in recent months. Studying six months’ data and calculating potential BTP moves on the back of the referendum result – and also factoring in an expected announcement from the ECB next Thursday that it will extend its QE programme – he forecasts that the iBoxx Italian covered bond index could tighten by around 5bp upon a slim “no” vote or widen by around 12bp upon a clear “no” vote.

Beyond the short term impact of the referendum, factors such as the banking sector’s wider woes will have a greater influence over OBG spreads, said Spies.

“We conclude that we would not fade the current spread development of Italian covered bonds, even under a surprising ‘yes’ result in the referendum,” he added. “Instead, we would expect some further spread widening in the medium term.”

Analysts noted that Spanish cédulas have widened further than OBGs in recent weeks, but attributed this to new issuance, and said they believe the Italians have further to go.

In the immediate term, a ‘no’ vote is expected to close European markets overall, at least for the first half of next week. Although primary markets recovered quickly in the wake of Trump’s surprise win, the Italian referendum is expected to have a more profound impact on European markets, given that it could raise questions about the future of the Eurozone, akin to Brexit.

“Even if things calm down in the second week of December,” said a banker, “why would you want to pull the trigger for a trade?

“I wouldn’t see the rationale for that.”

Another syndicate banker was more optimistic.

“If we have learned one thing from this year’s political events it’s that in many cases it turns out to be the opposite of the majority’s expectation,” he said. “This time everyone expects the worst, so maybe we will have a positive surprise for once.”

He noted that the ECB has announced that its asset purchases will be frontloaded between 29 November and 21 December – potentially supporting new issuance.

“There is the possibility that this could give secondary markets a push and help turn sentiment around,” he said. “With that in mind, I think there is still the chance for an issuance window next week.”

However, bankers are less positive on Italian issuance. The last new benchmark OBG was a dual tranche, Eu1.5bn eight and 15 year issue for Cariparma on 5 October, and supply is set this year set to almost halve from last year’s volumes.

Year-to-date benchmark supply of Eu6.5bn year to date compares with Eu12.5bn in 2015. This is the lowest volume out of Italy since 2012, when just Eu3.25bn was sold in the wake of the sovereign debt crisis.

“To be frank, OBGs are probably the covered bond segment that are benefitting the most from the ongoing CBPP3 buying,” said a syndicate banker who has been involved in much of this year’s OBG issuance. “The fundamentals are pretty bad in comparison to other countries, and the banking system has inherent risks, with high NPLs.

“With that in mind, a ‘no’ vote could make it even more difficult for Italian issuers next year. The negative fundamentals have been so suppressed by those QE measures, but an unfavourable result might bring them more into focus, and investors may understandably stay away from that asset class – given they still look expensive versus the sovereign.”