The fund, founded in 2009 by Malaysian Prime Minister Najib Razak, who remains the chair of its advisory board, is teetering on the verge of collapse amid multiple investigations around the world into allegations that billions were looted from it.
1MDB, or 1Malaysia Development Berhad, released a statement saying it was "now in default" on the bond after missing the $50 million interst payment, blaming a dispute with Abu Dhabi sovereign wealth fund, International Petroleum Investment Co (IPIC).
IPIC, the co-guarantor of the bonds, earlier this month accused 1MDB of failing to pay it back a $1 billion loan, the latest in a series of allegations of financial wrongdoing at 1MDB.
1MDB insists it repaid the loan, but IPIC says the money actually went to a company with which it has no relations. IPIC is refusing to guarantee the bonds until the loan is repaid.
The Malaysian fund said the failed interest payment triggered "cross-defaults" on two other bond issues, but sought to reassure skittish investors.
"1MDB reiterates that it will meet all of its other existing financial obligations and has ample liquidity to do so," it said.
1MDB, which ran up more than $11 billion in debt in a series of much-questioned investments, has steadfastly denied money was stolen or that it was in financial trouble.
Those claims have been severely tested lately, however.
Earlier this month a Malaysian parliamentary committee said at least $4.2 billion in questionable overseas money transfers were made by 1MDB.
The Wall Street Journal revealed last year that Najib received $681 million to his personal bank accounts in 2013, which Najib now claims the money was a gift from the Saudi royal family, most of which he returned.
Saudi Arabia's foreign minister recently said the money did come from his country, but only after weeks of silence that cast doubt over the claim.
In a series of more recent investigative reports, The Wall Street Journal said it has seen documents indicating more than $1 billion, which originated from 1MDB, had been funnelled to Najib's personal bank accounts.
Najib and 1MDB vehemently deny that.
Malaysia's ringgit currency and main stock index both weakened nearly 1 percent following 1MDB's announcement.
"Investors are pulling back now and it’s a knee-jerk reaction," Geoffrey Ng, director at Fortress Capital Asset Management in Kuala Lumpur, told Bloomberg News.
"It presents a credit risk issue to foreign investors and it causes uncertainty in terms of the outlook for Malaysian government credit ratings."
1MDB's problems have riveted Malaysia for more than a year, ratcheting up pressure on Najib to resign and raising concerns that Malaysian financial markets could be hammered by a 1MBD collapse.
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