if you don't use as then an xsl:variable with content and no select attribute produces a temporary tree, what we used to lovingly call a result tree fragment.

<xsl:variable name="x">hello</xsl:variable>

$x is (a sequence of one) document node that has a single text node child that has string value "hello"


<xsl:variable name="y" as="string?">hello</xsl:variable>

$x is (a sequence of one) string with value "hello"

Is this really the case?  Does it really mean that the processor doesn't
construct the temporary tree (and then atomise it?) - if so then it's
really useful.

Yes, he didn't just make that up :)
A not so fond farewell, more of a good riddance, to result tree fragments.