Yes, this is expected — muting a category will disable notifications from the category and hide it from /categories and /latest; everything else is left unchanged.
The category could be hidden from a group with a theme (which I could walk through if you’d prefer!), but it would be easier to restrict category permissions in the category’s settings:
This would prevent TL0 users from creating a topic in the category, which also prevents it from showing up in their composer. If they come upon the category or a topic within despite it being muted, they’d still be able to add replies — but would be prevented from creating a new topic. Would this be too restrictive in your case?