By Christopher Whittall 

Bond investors are betting further stimulus from the European Central Bank is a done deal, leaving markets vulnerable to a swift pullback if the bank disappoints at its policy meeting Thursday.

Riskier European debt has rallied this week despite Italy's "no" vote in a referendum on constitutional reform, the result of which has the potential to destabilize the eurozone. Italian debt also bounced back from a selloff on Monday.

Analysts say those moves, and others, reflect market expectations that the ECB will on Thursday extend its EUR1.7 trillion ($1.82 trillion) bond-buying program by at least six months until September.

Some central banks have bought bonds massively to lower borrowing costs and stoke inflation, and their actions and anticipation of them continue to exert an outsized impact on markets.

The ECB has a recent history of disappointing investors expecting more stimulus. The central bank's current appetite to extend its historic ultra-loose monetary policy may have been blunted by a recent round of encouraging economic data in the eurozone. The muted market reaction to the Italian vote could suggest ECB support is encouraging investors to ignore risks.

"What's priced into markets is a fully fledged extension of the program, " said Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Inc. But "we think there's a significant chance the ECB disappoints markets," Ms. Mateos y Lago said.

That could lead to a sell-off in the riskier government debt of Europe's so-called periphery made up of the weaker mainly southern economies, and even France, whose bonds have fallen ahead of the country's presidential election next year, she said.

The ECB has become one of the European bond market's biggest investors and investors have become used to their buying buoying prices.

In March, the bank raised its monthly asset purchases by EUR20 billion to EUR80 billion. In June, it added corporate bonds to its shopping list alongside government debt and more structured securities such as repackaged mortgages it buys under other purchase programs. The corporate bond buying saw companies' borrowing costs fall to historic lows as the market rallied sharply.

Equally, markets can tumble when the ECB disappoints.

Last December, the euro jumped more than four cents against the dollar, stocks tumbled and the price of riskier bonds fell after the bank delivered a smaller-than-expected package of stimulus measures.

ECB officials have said that they are sensitive to the risks that they could trigger overblown market expectations about future monetary policy.

"I would hate to come into work to see what would happen" if the ECB announced an end to its program, said Edward Farley, head of European corporate debt at PGIM Fixed Income.

With the bond-buying program scheduled to end in March, the ECB is running out of time to inform investors of its plans. Even as investors expect more stimulus on Thursday, the debate with some analysts is moving to whether the ECB could start tapering its stimulus program in March.

Like other investors, Mr. Farley expects a six-month extension to the ECB's asset purchases. Still, he says he has been avoiding securities like southern European corporate bonds that look most vulnerable "if there is any accident with central bank policy."

There is little sign investors expect that on Thursday. Peripheral government bonds and corporate debt has rallied this week despite the "no" vote in Italy's referendum which outgoing Prime Minister Matteo Renzi had presented as a way to revitalize Italy's stuttering economy.

Investors seemed unfazed by Mr. Renzi's resignation after the vote even though it could bolster the fortunes of the populist 5-Star Movement which has called for a non-binding referendum on Italy's membership of the euro.

The gap between 10-year Italian and German bond yields has narrowed by around 0.07 percentage point this week to around 1.56 percentage points, according to Tradeweb. Media reports that the Italian government was ready to take a controlling stake in troubled lender Banca Monte dei Paschi di Siena seemed also to fuel the rally.

The spread to Germany, the bloc's largest economy, also narrowed for Portuguese, Spanish and French bonds. The annual cost of insuring against a default protection on $10 million of European high-grade debt for five years using credit default swaps has dropped by around $4,000 to $74,000 this week, according to IHS Markit.

Economists highlight good reasons for the ECB to keep buying bonds. The central bank has an inflation target of close to 2% but consumer prices in the Eurozone were only 0.6% higher in November than the same month last year.

Others argue further stimulus isn't warranted. The eurozone's economic picture is brighter, with business activity growing at its fastest pace this year in November, according to a survey of manufacturers and service providers.

The market's subdued reaction to the Italian referendum may show that investors have become too reliant on the central bank to smooth over the eurozone's probelms, a factor that may concern some ECB officials.

"I don't think that [argument] will win the day, but it's a risk," said Stefan Isaacs, deputy head of retail fixed income at M&G Investments. It would be "dangerous" for the ECB to pull back before it has succeeded in boosting inflation, Mr. Isaacs said.

--Tom Fairless contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

December 07, 2016 12:12 ET (17:12 GMT)