Kyle Stewart, 27, may have been going fishing when he was spotted with the blade in Westoe Road, South Shields, at around 11.10am on Monday, July 27.
Stewart, of Halstead Place, South Shields, did not pull it from its case or brandish the blade, magistrates heard.
But he was holding it while involved in a 10-minute slanging match with a resident of a nearby black of flats.
Police found the blade down his trousers when they arrested him, leading to the prospect of a six-month jail term.
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He has now been handed a six-month community order and told to undergo rehabilitation work with the Probation Service.
Prosecutor Lesley Burgess said: “A witness’s attention is drawn to someone shouting, ‘He’s got a knife’.
“She then saw a male carrying a knife in a case with a sling or string around it.
“He was walking up and down, pointing the knife in the same direction towards a block of flats. He was pulling the knife out of his trousers.
“There was a male and female. He could hear swearing. The defendant pointed the knife in his hands, it’s outstretched in front of him.
“She has been very frightened and got into her vehicle.
“The police were called, and they describe asking the defendant if he has a weapon on him.
“They recover a knife from his trousers. He said that he had come out of his flat and was going to go fishing.”
Geoffrey Forrester, defending, said: “He had been asked by a friend to take a fishing knife which a friend had left at his house to his friend.
“A person was in a block of flats, shouting abuse, and he became involved in the argument.
“He accepts that he had the knife at all times inside the case during the incident.
“He never had any intention to take the knife out of the case and the blade was never exposed.”
Stewart, who pleaded guilty to possession of a bladed article, was also fined £120 and must pay £85 court costs and a £95 victim surcharge.