How does potassium nitrate work as an oxidiser?
If we assume potassium carbonate ($\ce{K2CO3}$) as the only solid reaction product, the overall reaction can be described as:
$$\ce{2 KNO3 + C12H22O11 + 11 O2 -&gt; N2 + 11 CO2 + 11 H2O + K2CO3}$$

when using sucrose for candy. With sorbitol, an equation like

$$\ce{2 KNO3 + C6H14O6 + O2 -&gt; N2 + 5 CO2 + 7 H2O + K2CO3}$$

seems fitting. In both cases, it is assumed that:


the nitrate is completely reduced to nitrogen
additional oxygen is needed


The latter is plausible, the rocket candy is supposed to burn layer-wise at the surface in contact with air. This allows for propulsion rather than one instant explosion.

Whether the nitrite is formed as an intermediate (or which organic intermediates are formed) is beyond my knowledge. However, once this partial reduction (nitrate to nitrite) has happened, I rather doubt that the reaction goes back again (to regenerate the nitrate).

As far as the bubbles are concerned, is it conceivable that the fuse wasn't completely dried and thus water was driven out?