They do show up under your award offering for any hotel, but if you proceed to try to book it, I believe it will not go through. I've tried that before. So I doubt you can really "book" a cat 7 with your cat 1-4 free night. You can only "dream about booking" it.
So you can say it's a glitch in as much that it should really not show up as a possibility.
Let us know if however you are able to proceed with the actual booking. It'd be interesting to know.