Pesando's (1978) paper, which has recently appeared in thisJournal, and work by Phillips and Pippenger (1976) suggest that the theory of efficient markets is a competing hypothesis with the preferred-habitat model developed in Modigliani and Sutch (1966, 1967) and Modigliani and Shiller (1973). This note will show that this view is not valid. This is an important issue because the view that market efficiency and the preferred-habitat model are mutually exclusive hypotheses can lead to mistakes in interpreting empirical work as well as to a misunderstanding of Modigliani and Shiller's seminal paper. Indeed, Modigliani and Shiller provide evidence that the preferred habitat, term structure of interest rates is consistent with bond market efficiency. Yet, the basic point raised by Phillips and Pippenger (1976) and Pesando (1978) will not be refuted by the analysis here: Market efficiency does cast doubt on the usefulness of these term-structure models in many contexts. The preferred-habitat model is represented here by the approximation:l