Fuzz will be visible around most peep sights yes. Waxing the string a little will help the fuzziness. Abrasions would usually create some fuzziness on a string--so it could have happened this during the installation of the peep--which BTW isn't unusual.
Not to worry, Winner's Choice is now selling quite a neat string care kit--wax conditioner and cleaner. Pickup one of these carekits, they're about $14.95--will work wonders on you strings and cables.
Best of luck!