I've changed my mind slightly. I don't think I can call it an actual mailwatch bug. The full explanation is at the above "bug" report link.
The solution? Edit your viewmail.php file and change following line
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$v = htmlentities($v);
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$v = htmlentities($v,ENT_NOQUOTES,"utf-8"));
Otherwise, don't worry about it. It's really a minor problem.