I don't believe it ever left bluetooth range of the phone.
Just now:
I unlocked the associated phone.
I put the watch back into sleep mode and took it off my wrist.
DND did sync into "sleep" mode while it was unlocked. The associated phone remained awake and unlocked.
I put the watch back on and woke it up by pushing the turny button for a while.
It asked for the pin. 🔒
I will try to recreate this again by letting it die all the way to see if that has any effect.