I had the same problem, then found out from another helpful ccer, that I was heating my marshmallows too much. You should only heat 40 sec, then stir very well, then another 20-40 secs. Less is more in this case. And lots of stirring to melt them towards the end. They are getting overheated. Heat as little as possible.
Also, let them cool a couple mins before you add the icing sugar. I tried this and no more air bubbles. Also, watch out if you re-heat in the microwave - same thing will happen. Heat as little as possible..
In the meantime, add more icing sugar for the stretchiness and work out the air bubbles as much as possible with kneading. Then you can pop any remaining ones with a little sterilized pin. Then try to cover the imperfections with decorations, if possible. That is what I did! Good luck!
HTH!
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