Behold my crappy sprite of the king holding the Masamune. Anyhoo, I figure that after Frog/Glenn was done with the Masamune it probably found its way into the possession of the royal family and the King was carrying the Masamune the whole time, but since its been hidden beneath his robe, no one realized. Actually this was all based on a fan fiction that I planned, but never actually put on paper. As for Maguss line, I never saw any evidence in the game as to why the people of Guardia actually thought the Masamune would harm Magus, but the fact that Masa and Mune obviously had a chat with people, I could assume that someone could have came away confused and a rumor became a legend. My personal opinion of course, but others may see it differently.
Actually, that sprite is better then most edits I do.
I think the fact that Frog used Masamune to defeat Magus, followed by the fact he was never seen again after his defeat through out the rest of the timeline, people started thinking that Masamune was the only sword that CAN defeat him as the story was retold over the years.