Munis rallied on European woes Wednesday, with the 10-year tax-exempt yield plummeting to a low not seen since September.

“The market saw some pretty significant gains with some bumps in the scale across the board,” said a trader in New York. “They are moving in tandem with Treasuries, and with stocks down almost 400 points and the overseas news, there is definitely a flight to quality in our world.”

The trader added that with everything going on with Europe, “we are not sure what is going to happen so we are responding instead of being proactive.”

In terms of deals, she said there was a fair amount of product to work through ahead of Friday’s holiday in both the negotiated and competitive markets. “For the most part there was pretty good reception,” she said. “Some deals were oversubscribed, but on competitive market, certain dealers are willing to pay through the market for bonds.”

A trader in San Francisco added that some buyers are holding off until next week.

“There could be good issuance next week and some pretty big-sized deals coming so dealers are saving some cash for that,” he said.

Tax-exempt yields finished the day down across the curve, according to the Municipal Market Data scale. Yields in the five-year spot fell three basis points while yields on six- to eight-year maturities fell five basis points.

Yields around the 10-year spot plummeted six basis points. Yields on the long end dropped three basis points.

The two-year muni closed at 0.42% for its seventh consecutive trading session. The 10-year muni yield finished down six basis points to 2.23%, the lowest it has been since Sept. 30 when it hit 2.22%. The 30-year muni yield closed down three basis points to 3.73%.

While the rally started this morning, it continued well into the afternoon.

“It was on fire this morning,” according to a trader in Chicago. “Before you got in it was moving and even at 7:30 a.m. it was picking up.” By afternoon, the market was “still very firm and up three to eight basis points in a lot of places.”

“There is very good activity,” said a trader in Atlanta. “As usual, when Treasuries are up, blocks move the fastest. High-grade blocks are moving.” He added that deals from Tuesday are “cleaning up” and there is good activity all around.

The Chicago trader said munis are dependent on where the Treasury is and what is going on with Italy and Greece.

“It’s been crazy here,” he said.

Indeed, munis followed Treasuries throughout the day. The Treasury market led the rally, opening lower and staying at those levels throughout the trading session. By the close, yields were down 11 basis points.

The two-year closed down one basis point at 0.24% while the 30-year finished down 11 basis points at 3.03%. The benchmark 10-year yield finished down 11 basis points to 1.97%, closing below the 2% mark for the first time in a week.

The stock market indexes were down between 3.20% and 3.88%. The Dow Jones Industrial Average was down 3.20%, or 390 points, to 11,781.

Once again, Italy stole the headlines. Munis and Treasuries showed gains Wednesday on fears that the country is now part of the bailout camp that includes Greece, Ireland and Portugal.

“The burst of optimism yesterday afternoon on news that Italian Prime Minister Silvio Berlusconi will resign after the new budget law is passed was short-lived,” Jennifer Lee, senior economist at BMO Capital Markets, wrote in her research note. “Very short-lived.”

In the primary market Wednesday, Citi priced for institutions $600 million of New York City Transitional Finance Authority future tax-secured bonds after two days of retail pricing. The bonds are rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.

Yields ranged from 2.84% with a 4% coupon in 2022 to 4.18% with a 5% coupon in 2038. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2021, with the exception of debt maturing in 2027 which will be callable with a 5.25% coupon priced at par in 2018.

In the competitive market, Wells Fargo won the bid for $400 million North Carolina limited obligation bonds. The credits are rated Aa1 by Moody’s, and AA-plus by S&P and Fitch.

Yields ranged from 1.60% with a 5% coupon in 2017 to 4% with a 4% coupon in 2031. Credits maturing between 2013 and 2016, and 2032 were not reoffered. The bonds are callable at par in 2021.

Bank of America Merrill won the bid for $335.7 million of San Francisco GO refunding bonds, rated Aa2 by Moody’s, AA by S&P and AA-minus by Fitch.

Yields ranged from 0.28% with a 2% coupon in 2012 to 3.89% with a 4% coupon in 2029. Credits maturing from 2014 to 2020, and 2030 were sold but not available. The bonds are callable at par in 2021.

Trades reported by the Municipal Securities Rulemaking Board Wednesday showed gains.

Bonds from an interdealer trade of California 5s of 2041 yielded 4.94%, eight basis points lower than where they traded Tuesday. A deal bought from a customer Washington 5s of 2041 at 4.12%, four basis points lower than where they traded Tuesday. A dealer bought from a customer Massachusetts Development Finance Agency 5s of 2040 at 5.06%, three basis points lower than where they traded Tuesday.

A dealer sold to a customer Connecticut 5s of 2026 at 3.17, six basis points lower than where they traded Tuesday. Bonds from an interdealer trade of Pennsylvania Higher Educational Facilities Authority 4.625s of 2028 yielded 4.04%, two basis points lower than where they traded Tuesday.

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