I suspect that's intended behavior. But if I'm understanding correctly, I think you could account for it with something like-

... | xargs -P10 -i sh -c 'command {} 1>{}.out 2>{}.err'

or maybe with tee:

... | xargs -P10 -i sh -c 'command {} | tee -a {}.out'

It would require your input not to have any special shell chars - e.g. no space.

It is definitely not something I would dare to run in production.

Yes. I use parallel if I need coherent output; otherwise I use xargs (which is significantly faster).