Preping old, locally degraded redwood siding with lead primer

My 1951 house has redwood siding and has lead based primer under three coats of paint. The paint is mostly in good conditions but a few locations are chipping badly, nails are rusting, and the redwood (horizontal pieces in lower 4-ft w/ vertical planks above) is badly degraded around some nails and splitting at some locations, mostly garage. New siding is not an options. I have scraped the flaking paint (containing chips for disposal) and screwed reinforcing plates to the back of the siding to minimize movement. Problems are likely due to moisture so I have painted the back where tar paper was not present; other locations likely due to cracks due to flexing at joints between horizontal & vertical and at nails - which I am caulking. To avoid sanding and to smooth the surface, I plan to use Kelly-Moore Kel-Bond Ultra primer (XIM Peel-Bond not available in my area).

I am concerned about wood that has degraded, mostly around rusted nails, and about sealing over the rusted nails. Is just wire-brushing degraded areas before applying caulk OK or should I drive in nails & use Dremel to removed degraded wood full depth? Maybe brush on some Wood hardener instead? Anyone have an opinion on quality of the Kel-Bond vs. Peel bond? Thanks.

Not sure where you are in the job. For best results I would have removed the siding and trimmed bad stuff away, drilled out old nail holes and filled them with redwood plugs and bought some new siding to replace the waiste. A metal flashing between the two sidings should be added. Oil based primer on both sides of siding would help.