That explains that it's not 'garbage' but it doesn't explain why hn isn't doing something a bit nicer than hosing the Unicode version. As another commenter pointed out, even just displaying both would probably be an improvement.
I can only speak to the parts I know about.
I get the feeling HN needs something of a rewrite for better Unicode support in general, based solely on the ways I've seen it strip Unicode from comments.
I also believe that a something better than the status quo is possible. Perhaps render the URL correctly then display the obfuscated URL beside it in between parentheses.
International domain names will never be used if browser and website support remains as horrible as it currently is.