To be honest, there is a third: that they believe that there is a good chance that the argument that their warrant was defective will prevail, so that disclosing the details of the NIT would release information and they'd still lose the case (because of the warrant's problems). So if they believe that the warrant-was-not-sound argument is likely to be granted, then they'd lose anyway, so why go all "open kimono"?
Don't forget that law enforcement has good lawyers too... and those lawyers can very easily evaluate the flaws in the government's case without the "help" of defense attorneys!
Yeah, I know this is less exciting than the "our stuff is so secret that we'd walk from a prosecution rather than tell anyone about it" motif, but it seems to me to be more likely.
[ So why bring the case in the first place? It's very possible that the prosecutor knew all about the issues, but was hoping that he could coerce a plea bargain from the defendant without having to follow through on the discovery process; if so, then the defense attorney called his bluff... which is itself quite rare. ]