Doesn't this process break when, e.g., master + A passes tests, master + A + B fails, but master + A + B + C + D passes again (having been fixed by C + D accidentally)?

I mean, it's pretty unlikely to happen, but it's possible. Plus it doesn't matter if all you cared about was that the HEAD of master passes tests, but not the whole history.

However, the current approach, if rebasing is used to squash every merge request into a single commit on top of master, allows you to have a linear history of the master branch where every commit is known to pass the whole test suite that was in existence at that moment, which, I think, helps a lot when bisecting.

I'm not sure if Rust compresses merge requests into a single commit on top of master, though.