Airtags on Apple Watch not showing up in Find Items

I am having an issue with my Apple products. It started when I bought a new phone and set it up. I resynced my Apple Watch (pairing/unpairing between the old and new phones). Once everything was set up on the phone and the Apple Watch was re-paired, I tried to locate an AirTag in 'Items' on my Apple Watch.

However, no AirTags appeared on my watch. This is when I started noticing further issues. While the AirTags show up on my iPhone and iPad, they are missing from the watch. All my devices—iPhone 17 Pro Max, iPad Pro (M4), and Apple Watch Series 11—are on the latest software updates (version 26.2).

On the watch, if I go to Settings > Privacy & Security > Location Services > Find My Network and try to toggle it, I get a popup saying 'Upgrade account security.' I have already hard-reset the watch and re-paired it with the new phone, but that did not solve the issue.

Furthermore, when I go to Settings > iCloud > Passwords & Keychain on my iPhone or iPad, I cannot disable it. it simply toggles itself back on automatically. I have Two-Factor Authentication (2FA) and Advanced Data Protection enabled.

My core issue is the AirTags not showing on the watch, but it seems iCloud is not behaving as expected. I am wondering how to fix this, whether the Keychain issue is related, and why this is happening.