I found the site where the odor is explained. I quote:
Smelly hot water
Anaerobic bacteria reacting with the magnesium anode forms hydrogen sulfide gas. This gas smells like rotten eggs. Hydrogen Peroxide can be used to get rid of the bacteria but it usually returns. Replacing the magnesium or aluminum anode rod with a zinc/aluminum alloy rod will often get rid of the problem. For more detailed information on solving the hot water odor problem and anode rod replacement go to the water heater section of our Links page.
This comes from the site: http://www.chilipepperapp.com/whwp.htm
Check it out for more information.