It's not a bug, but a feature... It is clearly commented as such, in llvoavatar.cpp:
And in fact, if v1.26.0 and former versions didn't do it, it might well be because I didn't spot this line when I did the Alpha wearable backport one year and a half ago... (EDIT: v1.26.0 behaves the exact same way).
I suppose that the rationale is that since we can't highlight the alpha-masked (and thus "transparent") parts of an avatar shape, it makes sense to cease alpha-masking them instead when the "Highlight transparent" debug feature is on...