All of the drill rod I've bought has been fully annealed, about the only source of hardened drill rod would be a drill or reamer blanks and even then I'm not sure that it would be fully hard.
From experience if you make an engine to that sort of tolerance it will be very difficult to run. If you're a little over in the rod size and a little under on the bore they just won't fit. If the sizes are dead on and the bore is a little crooked same problem. If a rod is a little bent (as metal is supplied) it'll jam at one end or the other.
A steam engine which is loose at most spots and tight at only a few will run like a watch. Too loose everywhere and it'll run, but noisily. Too tight all over and you'll have trouble turning it over with a wrench. The real art here is knowing where it should be loose and where it should be tight.