"Do Not Disturb" on iOS iMessage does not work
This is how Do Not Disturb was designed for text conversations. This feature blocks sound notifications and that’s it.

In fact, it works the same way the global Do Not Disturb works, with one major difference: going into Settings → Do Not Disturb and setting Silence to Always does NOT block banners or alerts for muted threads. The only way to disable those is by disabling them for ALL incoming text messages, or by activating the global Do Not Disturb.

If you are displeased with Apple’s implementation of this feature and believe it should work differently, I strongly advise you to voice your feedback to Apple.

Many people would agree with you, as a quick search will reveal.