Cor Blimey! Lol, we've even got an antipodean joining the party. Another sailor? Anyway, here's my tuppence worth. It looks to me as if the "bunting" theory and its supporting arguments are a shoal of red herrings dropped in to muddy the waters around this much debated warship.
ABTar pointed out back on page one that you don't dress a warship in bunting. And that the crossword setter's coy reference to the naval term is standard crossword fare - summed up succinctly in A's phrase "licence for irony".
I don't think the ambiguous "it" helps the case for bunting, even if it refers to the mast. A warship's mast is not dressed in bunting either.
And that's before you even get to the apparel question. I think it's straining a bit and stretching it to bring in the baby blanket or sleeping bag.
"Overall" is a garment (apparel) and the phrase is "dressed overall" so it's a typical crossword clue formulation and punning reference (even if a daft question) to ask if it (an overall, i.e. garment) is flying from the mast when a warship is "dressed overall". (Or the warship's mast if you prefer that reading of the ambiguous "it".)
(Is it flying from the warship's mast when it is dressed for a ceremonial occasion(7))
I'm sticking with Mrs Overall. But I'm keeping my pennies out of the betting, at least until we know the result of this election! Will be up all night tonight and no crosswording.