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I can confirm this bug still exists in 1.10.4 Revision: 174315.

The workaround I found is to create a new folder in my home directory called "OmniFocus" (no spaces, not "OmniFocus Backups") and then choose that directory as the backup location with the file chooser. That sets the correct location in the preference pane, and backups do indeed go there. I then just dumped the old backup files into the new folder and deleted the old ones.

When I initially tried to move the folder, I too started seeing backups every minute in my home folder, but that behavior stopped when I performed the above procedure.

It seems that the path isn't properly escaped to allow long folder names with spaces.