Thanks for the great replies- I was actually also wondering how the RSS feed in news.arc deals with this... Is there some hack in there for overriding the Content-Type or are web browsers more forgiving for RSS feeds? I couldn't find any specific handling in news.arc for this issue on inspection the other day...
Firefox's Live HTTP Headers plugin tells me that news.ycombinator.com/rss has "Content-Type: text/html; charset=utf-8". I imagine RSS clients are not very strict about what they accept.