The MATE Notification simply isn’t designed to parse HTML. I’ve not known the MATE or the Ubuntu notifications daemon to ever show italics… so it could be there for notification daemons that do support it. (such as KDE, maybe?)
An alternate is to use Ubuntu's notification daemon, which doesn't show them.
sudo apt install notify-osd
Once installed, change which daemon is used by editing this file as root:
sudo pluma /usr/share/dbus-1/services/org.freedesktop.mate.Notifications.service
With the Exec line reading this instead (for 64-bit):
Exec=/usr/lib/x86_64-linux-gnu/notify-osd
(You can also customise it, see @tiox’s guide for more)
To use it right away, stop the existing daemon, then send a test notification:
killall mate-notification-daemon
notify-send "Test Title" "<i>This will show normally</i>"
Although, RhythmBox is just being awkward by adding HTML tags.