...or I need to somehow protect drill holes better as this is not the first time I've had streaks of timber swelling underneath the colour because water gets in where it's not sealed while sanding. What's the best method here?
Bee's wax.

My method is scraping a small bit off the wax block with whatever tool is handy (teaspoon, paddle-pop stick etc) then pack the holes with my fingers. You don't need to fill the entire hole. Even just a few mil at the top is good enough.
I leave it slightly proud of the surface and then level them before wet sanding with something that won't scratch the finish (credit card or similar).
If there are small smears of wax from levelling the holes, I typically don't worry about it as it's not enough to clog the sand paper and will just sand away, but if it is significant enough to be of concern, I will wipe it off with naptha (shellite) on a clean bit of rag.

As for the swollen streaks in the grain, they will likely decrease as the timber dries out again, but usually don't go away completely. Unfortunately the only way I know to entirely get rid of them is a full level sand and refinish.

I've been lucky that the times it's happened to me (before I started plugging with bee's wax) the swelling has mostly been covered by a pickguard or bridge plate so I lived with it.