diff --git a/packages/ai/src/host.ts b/packages/ai/src/host.ts
index f7731f0f78a5..f7ee85619352 100644
--- a/packages/ai/src/host.ts
+++ b/packages/ai/src/host.ts
@@ -319,6 +319,11 @@ export function resolveAiTransportHeaderSentinels(
   const host = getAiTransportHost();
   let resolvedHeaders: Record<string, string> | undefined;
   for (const [name, value] of Object.entries(headers)) {
+    if (value === null) {
+      // applyLocalNoAuthHeaderOverride marks no-auth local providers with a
+      // runtime null marker outside the public string-only Model contract.
+      continue;
+    }
     const resolved = host.resolveSecretSentinel(value);
     if (resolved !== value) {
       resolvedHeaders ??= { ...headers };
diff --git a/packages/ai/src/transports/simple-completion-transport.test.ts b/packages/ai/src/transports/simple-completion-transport.test.ts
index c10bbf1bb735..b1c781f0dd2d 100644
--- a/packages/ai/src/transports/simple-completion-transport.test.ts
+++ b/packages/ai/src/transports/simple-completion-transport.test.ts
@@ -239,7 +239,7 @@ describe("prepareModelForSimpleCompletion", () => {
     expect(result).toBe(model);
   });
 
-  it("aliases a provider-owned stream when its wire-format api is already registered", async () => {
+  it("aliases a provider-owned stream while preserving its null auth-header marker", async () => {
     const builtInStream = vi.fn(() => createAssistantMessageEventStream());
     apiRegistry.registerApiProvider(
       {
@@ -260,6 +260,7 @@ describe("prepareModelForSimpleCompletion", () => {
       cost: { input: 0, output: 0, cacheRead: 0, cacheWrite: 0 },
       contextWindow: 32768,
       maxTokens: 2048,
+      headers: { Authorization: null } as never,
     };
 
     const result = prepareModelForSimpleCompletion({ model });
diff --git a/scripts/run-node-watch-paths.mts b/scripts/run-node-watch-paths.mts
index e23ccb5fcb80..11cc66d566e3 100644
--- a/scripts/run-node-watch-paths.mts
+++ b/scripts/run-node-watch-paths.mts
@@ -10,9 +10,11 @@ const RUN_NODE_PACKAGE_SOURCE_ROOTS = [
   // Root runtime code imports these package sources through tsconfig aliases,
   // while pnpm dev/watch still runs the root dist entrypoint. Treat them like
   // src/ so edits restart the same process that consumes them.
+  "packages/ai/src",
   "packages/gateway-client/src",
   "packages/gateway-protocol/src",
   "packages/markdown-core/src",
+  "packages/llm-core/src",
   "packages/media-core/src",
   "packages/media-generation-core/src",
   "packages/media-understanding-common/src",
diff --git a/src/agents/failover/context-overflow.test.ts b/src/agents/failover/context-overflow.test.ts
index 51f10f3b18ef..4bf926404de8 100644
--- a/src/agents/failover/context-overflow.test.ts
+++ b/src/agents/failover/context-overflow.test.ts
@@ -9,4 +9,12 @@ describe("isLikelyContextOverflowError", () => {
       ),
     ).toBe(true);
   });
+
+  it("does not mistake LM Studio prompt-template override guidance for overflow", () => {
+    expect(
+      isLikelyContextOverflowError(
+        'Error rendering prompt with jinja template: "Cannot apply filter upper to type UndefinedValue". You can override the prompt template in model settings.',
+      ),
+    ).toBe(false);
+  });
 });
diff --git a/src/agents/failover/context-overflow.ts b/src/agents/failover/context-overflow.ts
index 2dc28b0b1762..49b5d7135413 100644
--- a/src/agents/failover/context-overflow.ts
+++ b/src/agents/failover/context-overflow.ts
@@ -133,6 +133,9 @@ export function isLikelyContextOverflowError(errorMessage?: string): boolean {
   if (isContextOverflowError(errorMessage)) {
     return true;
   }
+  if (normalizeLowercaseStringOrEmpty(errorMessage).includes("prompt template")) {
+    return false;
+  }
   if (RATE_LIMIT_HINT_RE.test(errorMessage)) {
     return false;
   }
diff --git a/test/scripts/bundled-plugin-assets.test.ts b/test/scripts/bundled-plugin-assets.test.ts
index 2f9b0fe3e74f..3213409b67fd 100644
--- a/test/scripts/bundled-plugin-assets.test.ts
+++ b/test/scripts/bundled-plugin-assets.test.ts
@@ -119,6 +119,14 @@ describe("bundled plugin assets", () => {
     expect(isRestartRelevantRunNodePath("extensions/discord/src/activities/http.ts")).toBe(true);
   });
 
+  it.each(["packages/ai/src/host.ts", "packages/llm-core/src/types.ts"])(
+    "rebuilds the root runtime for %s",
+    (source) => {
+      expect(isBuildRelevantRunNodePath(source)).toBe(true);
+      expect(isRestartRelevantRunNodePath(source)).toBe(true);
+    },
+  );
+
   it("refreshes generated output metadata without recreating the watcher", async () => {
     await withPluginAssetFixture(async (rootDir) => {
       const packagePath = path.join(rootDir, "extensions", "canvas", "package.json");