In researching this, I have found that when I turn OFF the setting where users must be logged in to see any content, this works correctly.
So, when the option is turned ON that forces users to be logged in to see content, the email approval process doesn't seem to work correctly. YAF authentication seems to be forcing authentication even during the email approval process.
Strangely, when clicking an email approval link, if you log in with any valid existing user, it then does the redirect to the approval page and whoever the user was for the original email approval gets approved.
Is there a tweak (or something I'm missing) that allows me to successfully provide email approval AND prevent content from being seen unless you are an approved user?