Tested and confirmed it's working now.

There appears to be a behavioural change from 4.2.6 to 4.2.8 when using
the local clock as a source.

In 4.2.6 the sync would be almost instantaneous while on 4.2.8 it will
poll itself for a while before syncing as if it were an external
resource.

I was able to overcome this delay by setting the local source as
preferred

The new config in /etc/ntp.conf
server 127.127.1.0 prefer 
fudge 127.127.1.0 stratum 3

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https://bugs.launchpad.net/bugs/1558125

Title:
  ntpd doesn't synchronize to local clock (ntpd 4.2.8p4/xenial)

Status in ntp package in Ubuntu:
  Fix Released

Bug description:
  Ubuntu 16.04 (Xenial Xerus development branch)
  ntpd version: 1:4.2.8p4+dfsg-3ubuntu3
  Source available at: http://packages.ubuntu.com/source/xenial/ntp

  Using the local clock as a source for ntpd doesn't work anymore

  This appears to have already been fixed in  4.2.8p5 as per the bug report 
referenced below
  http://bugs.ntp.org/show_bug.cgi?id=2965

  
  Sample config extract from /etc/ntp.conf:
  server 127.127.1.0
  fudge 127.127.1.0 stratum 3

  
  Results from ntpq, we would expected the server to be reachable and synced :
  # ntpd -p
       remote           refid      st t when poll reach   delay   offset  jitter
  ==============================================================================
   LOCAL(0)        .LOCL.           3 l    -   64    0    0.000    0.000   0.000

  # ntpq 
  ntpq> as

  ind assid status  conf reach auth condition  last_event cnt
  =============================================
    1  4979  8011   yes     no    none     reject       mobilize   1

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