None of this works by the rules
Alright, let's unpack this.
A needle is not a weapon so it's an illegal target for blade of blood. It cannot even be an improvised weapon, as according to page 159, footnote 2 of Complete Warrior:
If an item has no weight worth noting, it doesn't deal any damage when used as a weapon
Blade of blood only deals extra damage on an attack, and this situation was not an attack, so it wouldn't work anyway:
The next time this weapon strikes a living creature, blade of blood discharges.
The spell deals an extra 1d6 points of damage against the target of the attack.
This is all the spell does. It does not make anything into a "living weapon" and you will have trouble dealing this extra damage when you can't deal damage with your "weapon" to begin with.
Swift fly is a personal-range spell so it cannot be cast on the needle. Nor could regular fly be cast on the needle, because it only affects creatures. Even if it could be cast on the needle, the needle would not go anywhere, because fly just grants a movement mode, not the intelligence to use it.
There are rules for what happens when a creature walks into another creature:
Square Occupied by Creature Three Sizes Larger or Smaller
A big creature can move through a square occupied by a creature three size categories smaller than it is.
The needle would be small enough that the swordsman could move through its square without so much as blinking. The needle would not even be able to make an attack of opportunity against him because it is not a creature, and has no attacks, nor sensory organs to detect someone passing by.
So now what?
I don't recommend retconning this - the NPC was fleeing already, it was cool at the time, let it go. Just make a note that these spells don't interact this way in the future.
If you actually wanted to do this (enchant an innocuous item and then run it into enemies) you would need telekinesis:
You can hurl one object or creature per caster level...
You must succeed on attack rolls ... to hit the target with the items.... Weapons cause standard damage ... Other objects cause damage ranging from 1 point per 25 pounds ... to 1d6 points of damage per 25 pounds.
You can see that even a 5th-level spell doesn't let you deal auto-damage against foes.