I believe you were right the first time.
The reason for the confusion may be as follows:
In BIAB, there are four possible chord settings.
1. No Rest - chords play normally
2. Rest (.) - silence
3. Shot (..) - chord is played, then cut off
4. Hold Chord (...) - chord played, but sustained
5. BIAB works as expected - for MIDI and Real Tracks.

Now for my experience with Real Band:
1. The four chord functions work as expected with MIDI.
2. They also work for Real Drums.
3. But, Real Band does not recognize these functions for any real instrument other than drums.
4. Result - no matter what chord function is set, real instruments keep playing as though there is no rest.

Test it out:
1. A measure of "No Rest"
2. A measure of "Rest" (.)
3. A measure of "Shot" (..)
4. A measure of "Hold Chord" (...)
5. Select any appropriate combination of instruments and tempo.
6. Generate.
7. Listen to the results . . .
8. MIDI AOK
9. Real Drums AOK
10. Real Instruments - still playing to beat the band, oblivious to the chord instructions.

Looks like a bug to me.