defaultMode: bypassPermissions in .claude/settings.local.json silently ignored, missing from Shift+Tab cycle

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report
• [x] I am using the latest version of Claude Code

What's Wrong?

permissions.defaultMode: "bypassPermissions" set in a project's .claude/settings.local.json is silently ignored — bypass permissions mode never appears in the Shift+Tab mode cycle, and the session starts in a different mode entirely. The CLI flags (--permission-mode bypassPermissions, --dangerously-skip-permissions) work correctly as a workaround, which suggests this is specifically a settings-file resolution bug rather than bypass mode being blocked outright.

Environment

• Claude Code version: 2.1.257
• Interface: CLI (terminal), macOS
• Plan: Claude Max (personal account, not Team/Enterprise — confirmed no managed-settings.json present, /Library/Application Support/ClaudeCode/managed-settings.json is empty)

Steps to Reproduce

1. Set "permissions": {"defaultMode": "auto"} in ~/.claude/settings.json (user-level)
2. In a project directory, set "permissions": {"defaultMode": "bypassPermissions"} in .claude/settings.local.json
3. Run claude with no flags/args in that project directory
4. Press Shift+Tab to cycle permission modes

Expected Behavior

Per docs (https://code.claude.com/docs/en/permission-modes#which-mode-a-session-starts-in and #switch-permission-modes):

• Project-local settings (.claude/settings.local.json) should take precedence over user settings (~/.claude/settings.json)
• A defaultMode value other than "auto" should apply "from any settings file"
• bypassPermissions should appear in the Shift+Tab cycle since permissions.defaultMode: "bypassPermissions" is set

Session should start in bypassPermissions mode, with it available in the cycle.

Actual Behavior

Only default (manual), acceptEdits, plan, and auto appear in the Shift+Tab cycle. bypassPermissions is completely absent, despite being set in the higher-precedence project-local settings file.

/status confirms all three setting sources are being read ("Setting sources: User settings, Shared project settings, Project local settings"), so the file is being loaded — the bypassPermissions value within it just isn't taking effect for mode-cycle purposes.

Workaround Confirmed

Both of the following work correctly and restore bypassPermissions to the cycle:

claude --permission-mode bypassPermissions
claude --dangerously-skip-permissions

This isolates the bug to settings-file resolution specifically, not bypass mode being disabled or blocked for the account.

Relevant Config

~/.claude/settings.json (user-level, conflicting defaultMode):

{
  "permissions": {
    "defaultMode": "auto",
    ...
  }
}

.claude/settings.local.json (project-local, not taking effect):

{
  "permissions": {
    "defaultMode": "bypassPermissions",
    ...
  }
}