[BUG] Title: Local HTTP MCP server shows "needs authentication" in UI despite claude mcp list showing ✓ Connected

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Description:

• MCP server: local HTTP at http://127.0.0.1:53333/mcp/stream
• claude mcp list output: DAST-Orch: http://127.0.0.1:53333/mcp/stream (HTTP) - ✓ Connected
• /mcp UI shows: Status: △ needs authentication, Error: SDK auth failed: (empty error message)
• Tools never load into the session — only the authenticate stub is available
• Server requires no OAuth (no /.well-known/oauth-authorization-server, responds to MCP initialize with 200)
• Was working previously with no changes to config or the server

Expected: Tools load into session and are usable
Actual: Session-level connection fails with empty "SDK auth failed" error while CLI health check passes

What Should Happen?

Description:

• MCP server: local HTTP at http://127.0.0.1:53333/mcp/stream
• claude mcp list output: DAST-Orch: http://127.0.0.1:53333/mcp/stream (HTTP) - ✓ Connected
• /mcp UI shows: Status: △ needs authentication, Error: SDK auth failed: (empty error message)
• Tools never load into the session — only the authenticate stub is available
• Server requires no OAuth (no /.well-known/oauth-authorization-server, responds to MCP initialize with 200)
• Was working previously with no changes to config or the server

Expected: Tools load into session and are usable
Actual: Session-level connection fails with empty "SDK auth failed" error while CLI health check passes

Error Messages/Logs

Steps to Reproduce

Description:

• MCP server: local HTTP at http://127.0.0.1:53333/mcp/stream
• claude mcp list output: DAST-Orch: http://127.0.0.1:53333/mcp/stream (HTTP) - ✓ Connected
• /mcp UI shows: Status: △ needs authentication, Error: SDK auth failed: (empty error message)
• Tools never load into the session — only the authenticate stub is available
• Server requires no OAuth (no /.well-known/oauth-authorization-server, responds to MCP initialize with 200)
• Was working previously with no changes to config or the server

Expected: Tools load into session and are usable
Actual: Session-level connection fails with empty "SDK auth failed" error while CLI health check passes

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.1.92 (Claude Code)

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

Terminal.app (macOS)

Additional Information

_No response_