I know this was suggested before, but I'd like to reopen the discussion regarding this.
By no means do I suggest an extra item for the actual sheathe, just a simple mechanic.
Allow one-handed equipped weapons (swords) to be displayed just as the axes are by right clicking the equipped item and selecting Sheathe via the flower menu. Same would apply to the sheathed weapon in order to Unsheathe.
I find the fact that you always keep the sword in your hand quite unpleasing, however I am not sure of the complexity of this in terms of scripting.
The sheathed sword would function exactly like an unsheathed one, so it's purely cosmetic, meaning that combat engagement will bring it automatically back into hand.
Furthermore it would create an extra thing to look out for when encountering a new player: does he have a sword on him or not?
Feel free to opine. Permanently wielding a sword into a hand is just weird imo.