The bypass valve is NOT used to 'temp' the hot water down.
Cold inlet valve should be wide OPEN & bypass fully CLOSED when WH is in service.
With the bypass cracked open the cold water line is connected to hot water line and the hot out check valve is being closed from cold water pressure.
You control water temp by mixing cold/hot at the faucet.
With bypass closed and no hot water flow.........check valve on hot outlet stuck closed.
Turn off water supply, open WH PRV to relieve pressure in tank and let water drain down in from top of tank.
Disconnect Hot outlet line
Inside the fitting on tank is a cheapo plastic plunger/spring/o-ring valve. Held inplace with a clip. Remove clip and internals. Then connect water line.
Turn on water supply...heat water........voila Hot water flow.
Then at you convenience install a shut-off valve in hot outlet lne and forget about that stupid check valve.